Alright. This has been called an outright war, gentlemen. There is no more sense being coy about it, so let’s recognize the battlefield tactics for what they are. For it is clear that this currency war is not just a mere act of policy (you wish!), but a true global trade statement – a continuation of trade policy by other means (sorry Col. Clausewitz).

Developed country with trade deficit

• NY Fed President William Dudley’s call for further policy stimulus saying that the unemployment and inflation rates in the US are “unacceptable”. The message is that the economic data is already bad enough to justify new stimulus.

• Mixed US data climaxing in a poor monthly US jobs report. Jobs, spending, and inflation are the key metrics that the Fed is watching, so the jobs report was especially significant for raising expectations for new quantitative easing.

• Risk Assets Higher On Rising Risk Appetite:This rising risk appetite created its own pressure on the safe-haven USD, as did Chinese comments supporting the chief USD alternative, the EUR.

• The combined effects of new stimulus expectations and rising risk appetite meant USD hedges like commodities and currencies moved higher.
• BoJ New Stimulus Fails To Lower The Yen Despite Rising Risk Appetite

• Markets believe bad jobs data raises chances of new US stimulus, which it believes will in turn push stocks higher, thus bad news becomes good news
• Much of the decline came from state and local governments, highlighting their growing funding problems, which represent another potential systemic risk to the US and thus global financial system
• Financial Media Focuses On ’Currency War’

• US Jobs Reports Highlight US State Fiscal Crisis

• US Earnings: Big Names Mostly Meet or Beat Expectations

COMING WEEK

• US Retail Sales, CPI Data

• US Earnings Season Picks Up Pace

• Continued Central Bank Currency Spin
• The Fed
• The Bank of England
• The ECB: EUR Longs Beware

WILDCARDS

Crude Oil hit a high of $84.09 on Thursday morning before investors sold into the rally in all commodities before the volatile jobs report on Friday morning. The shorts pushed Crude to a weekly low of $80.30 early Friday morning, which was a nice buying opportunity, as Crude Oil closed the electronic session on Friday at $82.84.

After the jobs report came in within expectations, there was substantial fund buying back in all the commodities across the board, with the thought that the still weak job market mandates the Fed to start the QE2 Program in a serious manner.

The following "initiative" from Mr. Geithner follows on from a theme articulated earlier in the week, in which the older and supposedly richer (in fact, the most indebted) economies are prepared to grant more power to the newer and less affluent (in fact, surplus economies with huge currency reserves and savings) economies in the G20, with respect to IMF voting rights.

WASHINGTON (MarketWatch) -- The United States has linked a faster rise in China's currency to a deal that would give the Asian country more sway at the International Monetary Fund. In a speech to the IMF's governing council on Saturday, Treasury Secretary Timothy Geithner said any agreement to give emerging market economies more voting power at the IMF "needs to be accompanied with more progress by countries, particularly the surplus countries, towards more market-oriented exchange rate policies and policies that will reduce reliance on exports and strengthen domestic demand." The top Chinese representative at the IMF talks, Zhou Xiaochuan, the head of China's central bank, has already rejected any link between the two issues. The U.S. has been seeking new levers to force China to let its currency rise.

Last Sunday night I wrote about the coming week:

If next Friday the Buck is lower across the board and the BoJ is a bit bloodied Ben Bernanke will light a cigar.

This week we look at some of the monetary policy decisions during the past week (Australia, Indonesia, Japan, Europe, UK, Philippines). Then we review some interesting data points from the US; non-manufacturing PMI, consumer credit, and the nonfarm payrolls report. Then we finish up with a look at the strong employment numbers in Australia.

1. Monetary Policy Review
Among the central banks announcing monetary policy decisions last week, the Reserve Bank of Australia held its rate at 4.50%, the Central bank of Indonesia held at 6.50%, the Bank of Japan decreased from 0.10% to between 0 and 0.10%, Bangko Sentral Ng Pilipinas held at 4.00%, the European Central Bank held at 1.00%, and the Bank of England held at 0.50%. So all quiet really except for japan who also announced a 5 trillion yen quantitative easing program where it would buy bonds, REITs, and even shares in an attempt to ease further and stimulate the economy. The close call was Australia, which is likely to raise at their next meeting as the Australian economy goes from strength to strength (more on this later).

There are too many equity, metal bulls and dollar bears to see a continuation of the recent move… only my opinion. We are still operating under the influence that Crude oil prices are moving higher but we reserve the right to change our mind on a settlement above $84 in the November contract. We’re suggesting clients remain on the sidelines, but if forced into the market we think a $5-7 move lower will come before a $5-7 move higher. The action in natural gas convinced me to hang on with clients today, but as we’ve stated of late, positions are mixed between November and December and time is not on our side. We do expect a 10% squeeze but from what level?

It appears we will have a strong finish to the week in indices, but on a disappointing jobs number… go figure. We remain short with clients in November ES puts. Perhaps a light trading week will get prices back in line next week, which would mean a lower trade.

Morgan Stanley has an interesting piece out today, arguing there is no ‘currency war’… yet. Win Thin made some points on this score yesterday, pointing to real effective exchange rates in developing countries. Morgan Stanley’s Manoj Pradhan has a different take, citing the lack of emerging market retaliation (see Global Monetary Analyst: QE2, March 4, 2009):

Brazil’s Finance Minister, Guido Mantega, recently sparked a lively discussion by saying that an ‘international currency war’ has broken out. Most EM currencies have been appreciating throughout 2010…

Currency traders are having a hard time keeping up as an “international currency war” threatens to destabilize the currency status quo. Despite efforts to keep currencies low, some currency exchange traded funds may decline as currencies continue to appreciate.

Dr. Dominique Strauss-Kahn, managing director of the International Monetary Fund (IMF), stated “there is clearly the idea beginning to circulate that currencies can be used as a policy weapon,” reports Julia Kollewe for The Sydney Morning Herald. “Such an idea would represent a very serious risk to the global recovery. Any such approach would have a negative and very damaging longer-run impact,” Dr. Strauss-Kahn adds.

By Jordan Roy-Byrne, CMT

If you’ve followed our work you know how useful intermarket analysis can be when deciphering future movements and trends in the precious metals complex. Years ago when I would analyze gold I would only follow gold. Now I am aware of a wealth of markets that can be analyzed, which can help provide an outlook for precious metals.

Recent weeks have seen much talk about "currency wars". This talk suggests that many countries are seeking the devaluation of their currencies in order to promote their exports, which in turn forces other countries to respond with similar efforts. It harkens back to the disastrous beggar-thy-neighbor policy that was seen between the two world wars. While the foreign exchange market is one of many arenas in which nation states compete for advantage, calling what is happening now a currency war is not only wrong, it is dangerous.

No Devaluations

Talk of currency wars have heated up as several events have converged to make the public increasingly aware of the on-going competitive devaluations around the globe. The increasing clamor came ahead of an IMF meeting Thursday and a G7 meeting this weekend where the topic of global trade and currency rates are hot topics. It is probably no coincidence that gold and silver started to go parabolic ahead of these meetings. The euro’s test of the 1.40 level against the U.S. dollar seemed to be a sufficient catalyst to cool off the rocket fuel quickly and abruptly. Even oil reversed sharply on Thursday. These moves have created “bearish engulfing” patterns which typically signal the end of a rally.

Gold stopped short of going parabolic

It is an extraordinary measure for a central bank, particularly the purchase of financial assets to encourage the decline in risk premiums. To be explicit on that point and to extensively influence market interest rates and risk premiums, the Bank judges it necessary to establish a program on its balance sheet through which the bank will purchase various financial assets.

- The Bank Of Japan, “Comprehensive Monetary Easing”, October 5

In a recent article I wrote about how the Federal Reserve and Washington D.C. will do anything possible to save the markets from a bear market before the November election. Unemployment is high, defaults on homes and credit cards are rising and record amounts of taxpayer’s money have gone to bail out failed banks. The last thing Washington wanted was another bear market before a November election. An emergency job bill was passed and the Fed started pumping money into the system. Now we are beginning to see the outcome of the Fed’s actions as the world looks at a deteriorating dollar and the tension that surfaces with volatile exchange rates. Recent job bills and quantitative easing may help tomorrow’s job report which could put some hawkish pressure on The Fed to change their stance.

I believe over the next few weeks volatility could increase as a major shift in Washington may occur. Although the equity markets are up, the dollar and the economy have not shown improvement. The “Tea Party” movement and politicians who push tax cuts and less government spending are gaining recognition. I would not be surprised if there is a shift in power which may be bullish for the dollar or another intervention from overseas to continue purchasing the dollar. Tomorrow’s job report could provide relief to the oversold dollar as additional government jobs were created through recent legislation and massive cash infusion from The Fed. The dollar could have a dead cat bounce.

I have made it clear that I believe the U.S. Treasury wants a weaker dollar. For more on that, see U.S. Treasury seeks weaker dollar. In addition to the post itself, the comment thread is very interesting and worth reading.

For different reasons, the Federal Reserve and the Bank of Japan are trying to weaken their respective currencies. China is allowing its currency, the yuan, to strengthen, but not quickly enough for the U.S.

As a result of the Federal Reserve’s next round of quantitative easing, Goldman Sachs is predicting a sharp slump in the US dollar’s value against other major currencies. In particular, the dollar is expected to weaken to $1.79 against the British pound over the next six months, $1.85 over the next year. The dollar will also weaken against the euro to as low as $1.55, according to Goldman. This is far cry from Dollar-euro parity. If the dollar does weaken to these levels, it will likely fan trade friction.

Notable in this discussion is that the all of the adjustment for US dollar currency debasement falls on the floating rate currencies like the euro, the pound, the Swiss franc and the yen. China’s currency, because of its fixed peg to the US dollar, will depreciate as well, setting up tensions with Japan and Europe.

Vincent Fernando and Kamelia Angelova write at Business Insider Clusterstock:

By Ronald Weisenstein

The U.S. dollar hit 15-year lows against the Japanese Yen Thursday, after data on U.S. unemployment benefits did little to reduce expectations that the Federal Reserve will resort to more quantitative easing.

Today could mark a key reversal for several markets, including but not limited to the US dollar, metals and energies. Oil reversed from these same levels in August… will history repeat itself? In recent blogs we hinted at this, and on confirmation tomorrow Crude will likely move back to the 50 day MA; in November at $77.70. If that is the case, we’ve seen an interim top in the distillates as well; that would drag heating oil and RBOB 12-15 cents lower. A bearish AGA report prompted natural gas to lose 4.4-6.25% depending on the month. Some clients have thrown in the towel; others will likely be out in the coming sessions if we do not move north from here. I feel we’re close to a bottom, being the sentiment is so bearish, but as the saying goes, markets can be irrational more than most investors can remain solvent. What really irks me is that Goldman is forecasting a 20-25% advance in natural gas in the coming months and clients will likely get out at the bottom. Unfortunately sometimes that is the way the cookie crumbles. We will advise clients to re-establish positions once an interim bottom is established.

The next leg in indices will be determined by the NFP tomorrow. We’ve positioned several clients short the S&P via November put spreads.