‘Terrifying Thursday’ ECB + NFP=weaker USD$!!!

The USD$ is stronger in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies in a ‘tight’ trading range, ahead of this mornings ECB rate announcement and US NFP report.

Being consistently unreliable, ADP has grossly overestimated the monthly change in private payrolls (ex-Gov.) from Nov. 2007. But, it has remained true in the direction, that being ‘down’. Its unclear if the report is playing ‘catch-up’ to the official private payroll data or if it continues to be an overestimation. Yesterday’s report revealed that US companies had slashed -79k employees last month (the previous month has also being revised down). The housing debacle, credit crisis and higher energy costs continue to contribute to companies paring employees. ADP has not been a good indicator for NFP of late and don’t expect it to reflect so this morning. NFP is expecting to once again show weakness in the labor market and market consensus is looking at a negative number great than 60k. Another report showed yesterday that US factory orders climbed for a 3rd consecutive month (+0.6% vs. +0.4%). Higher energy costs have kept refineries busy which has offset stagnating orders for equipment and machinery. The American Bankers association also reported a disturbing statistic. Consumers are falling behind on loans secured by their homes at the fastest pace in 20-years, which may be signaling a much weaker US economy than perceived.

Trichet and his policy makers will take center stage 45mins before the release of the US employment data. But, his press conference takes place at the same time. It’s widely expected that they will hike 25bp to 4.25%, but, the market will be more concerned with his communiqué. Will he provide further ‘hawkish’ rhetoric? The market has priced in already a 25bp hike, but, a cocktail of a weaker than anticipated NFP mixed with a stronger ECB hawkish sentiment will deliver a punch drunk USD$.

The US $ currently is higher against the EUR -0.02%, GBP -0.28%, CHF -0.11% and JPY -0.34%. The commodity currencies are mixed this morning, CAD -0.35% and AUD +0.03%. The loonie remains well contained within its tight trading range ahead of the US employment data this morning. It received a small boost yesterday from the negative private ADP report and stronger commodity prices. Investors believe that the Fed will be slow to hike rates and Canada will maintain that yield advantage which should in theory provide support for the currency. The markets tends to get ahead of themselves. A slowing US economy is not a positive for the loonie. 75% of Canadian exports head south and if one took commodities out of the equation Canadian economic data is not that hot. With higher fuel prices the consumer is expected to cut spending and company’s investment as the economy suffers a similar fate to that of its southern neighbor. Worse is anticipated for both the US and Canadian economies for the 3rd Q. The market expects the CAD$ will remain guilty by ‘proximity and association’. Technically and fundamentally the loonie should be stronger, but, perception seems to have the upper hand at the moment. Earlier this week RBA governor Stevens left borrowing costs on hold at 7.25%. He expects economic growth rate to slow as the highest borrowing costs in 12 years and record gas prices force households to cut spending. The AUD$ remains better bid as traders speculate that the Fed will delay hiking interest rates (2.00%), thus maintaining the yield advantage over the US (0.9622).

Crude is higher O/N ($145.00 up +143c). Yesterday’s weekly EIA report has done no favors in helping to ease crude prices, we have hit new record highs this morning. The report revealed an unexpected fall in stocks. Inventories fell -1.98m barrels to 299.8m, w/w, vs. an expected up-tick of +500k barrels. On the flip side gas stocks rose +2.1m barrels to 210.9m and supplies of distillate fuel (including heating oil and diesel) increased +1.3m barrels to 120.7m. The report has been bullish for crude and bearish for refined products. The market at the moment wanted and needs the opposite scenario, as this would have helped margins and encouraged the increase of processing rates. Refineries are operating at 89.2% of their capacity. Other variable continue to provide support for the ‘black gold’ prices. The IEA indicated this week that global supplies may not keep up with demand over the next 5-years. They believe that spare OPEC capacity will shrink in this time and keep the market ‘tight’. Despite the US State department denying a report that Israel may attack Iran by year end (perception is different however), a Mideast conflict continues to hamper the concerns of spare capacity. Iraq is currently OPEC’s second largest producer, any conflict will affect supplies. Year to date, crude has climbed nearly 50%, as the greenback struggles against most of its trading partners despite global policy makers seeking assurance from the US to support a strong USD$ policy. Libya has threatened to cut production and OPEC’s President predicting that crude prices could hit $170 a barrel by summers end does not help the situation. President Khelil from OPEC believes that if the ECB hikes rates this morning coupled with hawkish rhetoric would lead to another surge in oil prices. Expect geo-political concerns to continue to influence the market in the short term. Gold remains better bid on pull backs as Mideast geo-political concerns and a weaker USD$ has traders seeking the safety of the ‘yellow’ metal for now ($943).

The Nikkei closed at 13,265 down -20. The DAX index in Europe was at 6,259 down -46; the FTSE (UK) currently is 5,416 down -10. The early call for the open of key US indicies is higher. Yields of the US 10-year bond eased 4bp yesterday (3.96%) and are little changed O/N. Treasury prices received a boost from the weak US ADP private employment report. Traders are becoming concerned that the Fed will be slow to hike rates (2.00%). Of course this mornings NFP will paint a better picture.

A senior Japanese official said this morning that when the G8 convene next week July 7-9th at the leaders Summit in Hokkaido, leaders will discuss how the weak USD$ is a contributing factor to higher energy prices. We may have a break through!

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