EUR remains Lethargic

A messy NFP report has many scratching their heads. When Canada can create twice the number of jobs than its much bigger cousin we could be in big trouble. A Trichet ‘balanced inflation’ statement coupled with geopolitical risk premium being applied took some of the wind out of the EUR bulls sails last week.

The EU Leaders summit failing to deliver confirmation of market expectations for strengthening of the EFSF, and instead, exposed some regions pushing back many aspects of Franco-German plans for reform can only weigh on the currency. It will not be viewed as a complete ‘breakdown of plans to enhance the EFSF and its lending capacity, but the result certainly reduces the chances of an early resolution to concerns about support for peripheral sovereign financing’.

This week, the UK will be capital markets main focus in Europe, with its production numbers, Asset Facility and the BOE rate announcement. In North America, we will get building permits and housing starts out of Canada, ending the week with its Trade number. Bernanke is due to testify on the economic outlook and monetary and fiscal policy before the House Budget Committee and finish the week with the US’s Trade Balance and Preliminary UOM Consumer Sentiment release. Down-under, the market will focus on the Aussie job numbers out midweek.

The US$ is mixed the O/N trading session. Currently, it is higher against 9 of the 16 most actively traded currencies in a ‘subdued’ O/N session.

Forex heatmap

The market witnessed a messy NFP release, with a disappointing headline print (+36k vs. +136k) and a market appealing unemployment rate (+9% vs. +9.5%). It was not a weather report despite headlines on the massive number of people who could not make it in to work due to snowstorms. Making it to work or not is not the relevant issue. It’s whether you were still counted on payrolls for any part of the reference period that matters. There are 43.8% of Americans or 6.2m been out of work for six-months or longer. All the report does is solidifies Bernanke’s QE2 agenda.

The USD$ is lower against the EUR +0.09%, GBP +0.19% and higher against the CHF -0.32% and JPY -0.28%. The commodity currencies are weaker this morning, CAD -0.19% and AUD -0.07%. Canadian employment numbers blew analysts estimates out of the water on Friday, beating them by four times (+69.2k vs. +18.2k). The unemployment rate jumped two ticks to +7.8%. It’ worth noting that just under two-thirds of the report was supported by the Public sector. Is that sustainable? The gain was split between full-time (+31.1k) and part-time jobs (+38.0k). Less of the headline job rise will flow through to an expansion of hours worked given the 55% weighting on part-time jobs. Anything that indicates that US growth is strong tends to positive for the Canadian growth outlook and that’s because of the country’s proximity and close trading ties with its largest neighbor. Concerns about the over valued Canadian dollar, according to Governor Carney, waning government capital spending, a cooling housing market, and moderating retail sales will eventually combine to limit overall GDP growth this year. These are all stellar reasons for BOC to be concerned, as a ‘persistent strength in the currency is a threat to economic expansion’. With strong risk appetite in vogue, the loonie has cautious buyers on dollar rallies (0.9883).

Australian retail sales disappointed, pushing the AUD lower in the O/N session. Sales advanced +0.2% over Christmas, after a revised +0.4% gain in November. The market had been expecting a +0.5% increase. It’s expected that higher market interest rates likely were the main reason consumers tightened their purse strings. The RBA has kept rates on hold the last two meetings after tightening for seven times in a calendar year. In it’s quarterly policy statement last week the RBA stated the ‘the modest rate of increase in household indebtedness suggests that household behavior remains cautious’ and that ‘there are a few factors, including the recovery in household net worth over the past 18 months and the improvement in the labor market, that would suggest that growth in household consumption is unlikely to remain as low as over the past couple of years’. Other data revealed that job ads rose +2.4% last month, but the December print was revised down to +1.2% from +2.0%. Focus this week will be on the more important employment data out on Wednesday, particularly after the disappointing increase of only +2.3k in December. In his communique, after leaving rates on hold last week, Governor Stevens said that policy makers will ‘look through’ the near-term affect growth and prices of flooding across the nation’s east coast will have. Stevens stated that ‘flood reconstruction doesn’t pose much inflation risk and called the global economic outlook strong for this year. He went on to say that ‘net additional demand from rebuilding is unlikely to have a major affect on the medium-term outlook for inflation’. The RBA ‘expects that inflation over the year ahead will continue to be consistent with its 2% to 3% target range’. It’s difficult to sell AUD on the back of the statement as it removes any chance whatsoever of a rate cut. The market looks for better levels to own the currency as investors look towards the ‘carry trade’ (1.0124).

Crude is higher in the O/N session ($89.18 +15c). Oil retreated on Friday as a stronger dollar curbed the investment appeal of dollar-denominated commodities. Crude’s inability to break through key technical resistance above also provided pressure. Trichet’s ‘broadly balanced’ views had the EUR bulls seeing red. The market has been worrying about the surety of supplies from the Middle-East. In fact supplies so far have not been disrupted. Investors should realize that the Suez, even it were blocked for some time, would only disrupt transportation routes and have little impact on overall supply. However, geopolitical risk premium will be continued to be priced in on pullbacks, its only human nature. Last weeks EIA report revealed another build up in inventory. Crude stocks grew by +2.6m to +343.2m barrels, which is +4.3% above year-ago levels. The market had expected oil stocks to grow by +3m barrels. Gas was the surprise, growing by +6.2m barrels, or +2.7%, to +236.2m barrels. That was +3.6% above year-ago levels. The four-week gas demand was +0.6% higher than last year, averaging nearly +8.7m barrels a day. Refineries ran at +84.5% of total capacity, a rise of +2.7%. Finally, distillate inventories (diesel and heating oil) fell by -1.6m barrels to +164.1m. OPEC believes that supply and demand is ‘in balance’ and reports that the US government may be pressuring Egyptian President Mubarak to resign is also commodity price negative. Fundamentally there is far more oil in storage, more fuel capacity and more idle oil wells to limit a much stronger market rally. Over the last ten trading sessions it has been fear that greatly exaggerated commodity prices.

Gold has lost some of that geopolitical risk premium support on expectations that Egypt’s president may be getting closer to his resignation. The commodity has been further pressurized by a a stronger dollar reducing the demand for the metal as a safe haven investment. The commodity has been on the back foot this month on lackluster physical buying as the commodities appeal deteriorated and on hedge fund liquidation triggering vulnerable support levels. Before tensions in the Middle East, investors had been shying away from the commodity and sought ‘price appreciation’ in equities. Fundamentally, the bulls are trapped in this month’s price range with the trend turning against them. Natural physical buying has been less than modest with the commodity off to its worst start in 14-years. Has the gold peaked or is simply a short-term correction? With the Euro-zone being able to sell their bonds, there’s less of a flight to quality ($1,349 +40c).

The Nikkei closed at 10,592 up +49. The DAX index in Europe was at 7,280 up+64; the FTSE (UK) currently is 6,047 up+50. The early call for the open of key US indices is higher. The US 10-year backed up 15bp on Friday (3.66%) and is little changed in the O/N session. Treasuries tumbled, pushing 10-year yields to the highest level in seven-months, as an unexpected drop in the US jobless rate and data showing growth by factories and service industries fueled bets the US economic recovery is gaining steam. Investors continue to demand compensation for the prospect of accelerating inflation and on speculation the US may struggle to fund its deficit. Higher yields benefit the dollar but will upset Bernanke. Dealers are also making room to take down $72b of new product and expect them to continue to pressurize the curve to make room ($32b-3’s, $24-10’s, $16b-30’s).

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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