On August 21st, Australia held general elections for Prime Minister and if you recall, the votes were so tight that nearly 2 weeks later, there is still no clear winning. The country is in a political deadlock but thankfully this matter could be resolved in the coming week as Julia Gillard secures the support of a key independent Member of Parliament. Given how long the process has been drawn out for, the Aussie may rally as long as there is winner.

Meanwhile Japan has a leadership election within the Democratic Party on September 14th. This is not an open election but a secret ballot. The former secretary general of the ruling Democratic Party of Japan, Ichiro Ozawa, has already begun his campaign against Prime Minister Naoto Kan. Ozawa pledged direct government intervention in the currency market in his policy platform stating “as for any sharp rises in the Yen from now on, I will decisively take all possible measures including market intervention to protect Japan’s economy.” Elections for the top DPJ post are slated for later this month and if Kan loses, Ozawa would become Japan’s sixth Prime Minister in 4 years.

Based upon his comments, the Yen has become one of the key political platforms that Ozawa is running on.

This may pressure Kan to act on the Yen before the election if only to keep his job. Ozawa also promised 2 Trillion Yen or $23.7 Billion in economic stimulus, a measure double the size of that planned by Prime Minister Kan. To Kan’s credit, however, he intensified his tone of Yen comments by telling reporters today “excessive movement in the currency market is bad for the economy and financial markets,” and “I have the utmost recognition of this. We will take decisive action when necessary.”

A win by Ozawa would probably be positive for USD/JPY and negative for the Japanese Yen in particular because of his criticism against a strong currency.

The U.S. dollar skyrocketed after the stronger than expected non-farm payrolls report. Not only did the headline number surprise to the upside, but private sector job growth beat expectations with the July figures also revised sharply higher. This positive non-farm payrolls number will bring relief to both the currency and equity traders and suggests that September may actually be a good month for the financial markets. Given the global impact of the U.S. recovery, everyone around the world will be cheering this report.

Non-farm payrolls fell by only 54k in August, compared to the forecast for 105k job losses. The July figure was revised higher from -131k to -54k. Private sector payrolls rose 67k against a 40k forecast with the July number revised up from 71k to 107k. Excluding Census workers, August payrolls increased by 60k. Cutbacks forced government workers to slash 121k jobs last month but U.S. corporations picked up the slack. The only black mark in the report was the unemployment rate which rose from 9.5 to 9.6 percent.

Although this was the third consecutive month that more jobs lost than acquired, this is the best outcome that investors could have hoped for. The stronger non-farm payrolls report will reduce the pressure on the Federal Reserve to implement additional Quantitative Easing and practically guarantees that the central bank will make no new announcements on Sept 21st. Central bank officials will be able to enjoy the Labor Day holiday with a lighter heart knowing that the labor market is moving in the right direction.

It is no secret that U.S. corporations are flush with cash and the non-farm payrolls report suggests that they are beginning to spend their money by increasing their workforce. The sustainability of the improvement is important but the August number along with the July revision already indicates that job losses in the third quarter was not as bad as previously feared.

As long as the non-manufacturing ISM report at 10am NY Time is not horrendous, we expect the U.S. dollar to hold onto its gains against the Japanese Yen and the EUR/USD and GBP/USD to remain firm as long as equities trade higher during the North American session.

According to the WSJ, Wen has made similar comments earlier this year on the euro’s importance, such as in mid-July when he met German Chancellor Angela Merkel he said Europe remains a key market for China’s foreign-reserve investment. China has said it aims to make better return on its vast holding of foreign-exchange reserves and ensure safety of its investment of the foreign-exchange assets.

Reading between the lines, we can tell that a large part of the increase in volume is due to the trading activities of RETAIL traders! (Yes, we are making a BIG difference) According to the BIS report, 48% of the growth was in spot transactions which represents 37% of the total turnover (or total FX flow). Although swaps became more popular to trade, all other related foreign exchange instruments saw only a 7 percent increase in volume. The report also says that “the higher global foreign exchange market turnover is associated with the increased trading activity of “other financial institutions” (think retail forex brokers). Turnover in this category rose 42% and for the first time ever, reporting dealers (banks) did more transactions with “other financial institutions” than with other banks.

Having just come back from Singapore where shelves and shelves were filled with forex trading books, I am in no way surprised that the BIS has confirmed the popularity of forex trading.

The foreign exchange market also became more global with cross-border transactions representing 65% of trading activity in April 2010, while local transactions account for 35%.

U.S. Dollar Becoming Less Important

Back in 2001, the U.S. dollar was involved in 90% of all currency transactions and as of April 2010, this fell to 84.9%. The decline in trading of dollars has benefited the euro, which gained 2 percentage points in market share since the last survey and accounts for 39% of all transactions. “The Japanese yen also increased its market share by 2 percentage points to 19%, a recovery relative to the 2007 survey but still below its peak of 23.5% reached in 2001. The pound sterling gave up most of its post-euro gains, with its share returning to the immediate post-euro level of around 13%. Trading in the Swiss franc also declined marginally to 6.4% from 6.8% in April 2007. The Australian and Canadian dollars both increased their share by around 1 percentage point, to 7.6% and 5.3%, respectively.”

“The percentage share of the US dollar has continued its slow decline witnessed since the April 2001 survey, while the euro and the Japanese yen gained relative to April 2007. Among the 10 most actively traded currencies, the Australian and Canadian dollars both increased market share, while the pound sterling and the Swiss franc lost ground. The market share of emerging market currencies increased, with the biggest gains for the Turkish lira and the Korean won.”

Of the major currency pairs, trading of EUR/USD and USD/JPY have increased while trading of the GBP/USD has decreased.

The U.K. is still the largest trading center for forex but the relative ranking of foreign exchange trading centres has changed slightly from the previous survey. The United Kingdom continued to be the most active location with a share of 46% of worldwide trading, followed by the United States with a share of 24%, slightly down from 2007. Outside these two centres, trading took place primarily in France (7%) and Japan (3%), both slightly down from 2007, Singapore (3%) and Switzerland (3%), both slightly up. Turnover in Germany almost halved to less than 2% in April 2010 compared with 2007. Banks located in the United Kingdom accounted for 36.7%, against 34.6% in 2007, of all foreign exchange market turnover, followed by the United States (18%), Japan (6%), Singapore (5%), Switzerland (5%), Hong Kong SAR (5%) and Australia (4%).

Lower Forex Margin Should Temper Volume Increases in the Future

However the pace of growth will most likely be moderated by the reduction in leverage announced in the U.S. and Japan. Last month, Japan reduced leverage to 50:1 and plans to bring this down even further to 25:1 next year. U.S. regulators announced earlier this week that leverage will be capped at to 50:1 for major currencies and 20:1 for all other currencies. This will go into effect on October 18. Lower leverage will make forex trading less attractive to some participants but 50:1 is still very generous leverage by all counts and so it will not be catastrophic for the retail forex industry. We should still see retail trading contribute positively to forex volume, but probably not by the double digit levels seen in past years.

At that time, I said “Although seasonality does not equal a certainty of USD/JPY weakness, it is worth noting that 83 percent of time, USD/JPY has ended the month lower by an average of 2 percent. Considering that USD/JPY started the month at 86.46, a 2 percent move would put it below its November low of 84.83.” Not only did we reach that level, but USD/JPY fell to a low of 83.53 last week - seasonality has proven to be effective once again!

Possibility of Yen Intervention

I like CHF/JPY

Talking about possibility of additional stimulus pre Jackson Hole

Here are some pics from Investfair and the Masterclass that I gave in Singapore

Speaking at the GFT Booth - Can you find me?

Presentation at Investfair

Forex Masterclass at the DBS Auditorium

Checking out the rooftop of the Marina Bay Sands