No Irish luck for Portugal

With employment reports out of the way, like homing pigeons, Capital Markets return to the issue of Euro-peripheral supply. Portugal, Spain and Italy are due to issue bonds later this week. Their ability to place their paper will be ‘the key test’ for European financial markets. Raising the odds is Der Spiegel reporting that Germany and France will urge Portugal to seek EU/IMF bailout. It’s believed that Portugal is negotiating a private placement. Their objective is to take some pressure off, rather than rely solely on the market and having to defend her sovereignty in the press. The reality is that funding concerns are likely to intensify over the coming weeks ahead of the heavy debt redemption in the second quarter. The ECB meeting this week will have limited affect on the market because of peripheral stress concerns dampening any tightening prospect. Capital Markets are on the hunt and Portugal is in the cross-hairs.

The US$ is stronger the O/N trading session. Currently, it is higher against 12 of the 16 most actively traded currencies in ‘whippy’ O/N session.

Forex heatmap

Last week’s ADP performance was the worst first pass guide to the eventual NFP print on Friday. Private payrolls rose only +113k, a small and disappointing improvement from the previous month. Digging deeper, revisions played a positive role, but only mildly, with the cumulative revisions adding +70k for October and November. Adding that in to the December headline raises the total job gain to +173k which was better, but the revisions still leave behind a soft report and strong reason why the Fed remains adamant with their QE2 approach. The figure that matters most to many analysts is the aggregate hours, it only climbed +0.1% last month. It has been flat for the past two months and are only +0.9% higher for the past six. Technically, its the hours worked that matter to judging overall compensation, not the body count, and this says that income growth remains very soft. No growth in wages or hours worked continues to point to a stagnant US job market. The consumer spending has picked up of late, obviously not because of income gains, but because of a falling saving rate. A robust economy requires a much stronger jobs growth landscape and this is not one. All of the job growth was in private sector (+115k). The surprise was the unemployment rate falling to +9.4% from 9.8% and for all the wrong reasons, people exiting the workforce. The labour force shrank-260k, pushing the participation rate to 64.3% from 64.5% . The report gave us some positives, but not many to back a winning formulae.

The USD$ is higher against the EUR +0.00%, GBP -0.32%, JPY -0.04% and lower against CHF +0.15%. The commodity currencies are weaker this morning, CAD -0.34% and AUD -0.59%. The loonie ended the week outperforming nearly all its major trading partners after another stellar domestic employment report on Friday (+22k and +7.6% unemployment rate) and on the back of stronger commodity prices. The strength of the CAD is being fueled by its cross play, especially vs. the EUR which saw the loonie advancing +4% on the week as sovereign debt concerns again take hold. Dealers are pricing in a rate hike by the BOC at the beginning of the second quarter. Stronger data down south reinforces many analysts’ views that the US economy is beginning the year in upward momentum and reason enough for short term chartists to be eying 0.9750 CAD in the first-quarter. After last weeks congested play, investors will look for better levels to want to own the currency.

Australian data O/N again has the currency on the back peg. The construction performance index contracted in December for a seventh straight month (43.8), a sign that the RBA’s interest-rate increases are restricting demand for new housing. Analysts note that ‘businesses and home buyers continue to refrain from committing to new projects with expectations of further rises in interest rates a likely factor (4.25%). The market is focusing on the Australian job’s data this Thursday, it will be critical for near term direction of the currency. The weaker data reported of late is expected to slow the pace of tightening, but unlikely to end the hike cycle as employment growth remains a strong variable. Policy member’s statements last week believe that the government’s stimulus measures will pressurize Governor Stevens to hike rates (4.75%) and that the flood in Queensland ‘may exacerbate already constrained supply conditions and lead to inflationary pressures’. These are good reasons supporting the currency on deeper pullbacks as investors seek to cross the currency vs. the EUR. Last year the currency rose +14% against the dollar which drove down the cost of imports and eroding exporters’ competitiveness. It’s all down to the employment numbers. Short term offers appear on rallies (0.9900).

Crude is higher in the O/N session ($88.73 +70c). Crude prices softened Friday, after the US employment report added fewer jobs than expected last week, unraveling some of the strength recorded after a surprising gain in the ADP report and growth in the services sector boosted optimism that the US economy’s recovery is gathering sustainable momentum. The weekly EIA inventory report revealed that oil stocks fell -4.16m barrels last week, three times more than expected. At +335.3m barrels, inventories are above the upper limit of the average range for this time of year. Gas inventories increased by +3.3m barrels and are in the upper half of the average range, while distillates increased by +1.1m barrels. Again, there are too many hurdles to overcome ahead of the psychological $100 barrier crude. Technically, the market is not showing a tighter supply or demand balance. OPEC believes that supply and demand are ‘in balance,’ and expect demand growth will slow as the global economy struggles to recover, amid ample supplies. The market expects to meet price resistance above $90 as there is far more oil in storage, more fuel capacity and more idle oil wells to limit a stronger market rally in theory.

Gold prices again fell foul on speculation that an economic recovery will curb demand for the metal as a haven. Fast money and the reducing of flight to quality positioning has been pressurizing the yellow metal, as equities, being used as an alternative, is providing more of an appeal in the New-Year. On deeper pullbacks, the commodity should remains better bid on speculation that currency volatility will boost demand for a safe heaven investment as the Euro contagion fears raise its ugly head. The commodity last year completed its tenth annual advance with bullion rallying +30%, it’s largest rally in three years. Even though the one direction trade feels overdone, investors continue to hold gold as a hedge against long-term inflation and have some strong technical support levels to breach before the markets witnesses a mass exodus. The Euro-zone contagion issues continue to put a floor on metal prices on demand for a haven. Technical analysts believe that gold ($1,370 +$1.90c) will outshine other precious metal in 2011 and peak somewhere above $1,600 in 2012.

The Nikkei closed at 10,541 up+11. The DAX index in Europe was at 6,921 down-26; the +FTSE (UK) currently is 5,965 down-19. The early call for the open of key US indices is lower. The US 10-year eased 8bp on Friday (3.32%) and is little changed in the O/N session. Goldman and PIMCO who happened put a dampener on last weeks ADP report translating into a strong NFP report were spot on. Their accurate prediction coupled with Helicopter Ben reiterating that the US labor market’s recovery will be gradual again provided a bid for the FI asset class. After the disappointing NFP print, yields happened to touch their lowest levels in two weeks. In front of the Senate Budget committee on Friday, Bernanke defended his policy makers QE2 approach and set expectations back further by reaffirming that there not quick fixes. This week, the US Treasury Department will auction a total of $66b of new supply ($32b-3’s, $21b-10’s and $13b long bonds). Will there be another uptick in demand because of Portugal and her peripheries?

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell