Is NFP an opportunity to sell EUR’s higher?

This week, the market has had the credit crunch talk, the recapitalization debate and Trichet’s signing off with his future infamous phrase, “we are in a global crisis”. The week is nearly finished, just one more release of significance and it happens to be the grandaddy of all fundamental prints, non-farm payrolls.

There has been less banter than usual amongst dealers after ‘private’ payrolls and weekly claims. The market tends to hear some boisterous revisions. This morning’s release is more about a ‘hope and play’ print. The last minute chatter is leaning towards a weak payroll. Consensus is gathered somewhere between a +55k and +75K print. Weaker ‘positive’ data would be consistent with a freeze in hiring rather than a cutting of jobs, but will likely stoke recession fears. Investors should focus on ‘hours worked’, if it shrank for a second consecutive month recession fears could be correct.

Forex heatmap

The weekly claims announcement was but a blip on Trichet’s radar when he began delivering his final communiqué yesterday. The release ended up being a nonevent. New claims advanced a tad last week, +6k seasonally adjusted to +401k. The data was better than expected. However, it remains the wrong side of the psychological benchmark of +400k. The four-week moving average, a more reliable reading, fell-4k over the week to +414k. The numbers suggest that the labor market is stabilizing. Recent released indicators have generally pointed to continued weakness. Today’s NFP print will be able to prove or disprove that theory. Consensus this morning is looking for a +75k print or a drop in the unemployment print (+9.1%). Yesterday’s report showed that continuing claims hovered around +3.7m, down-52k on the week. It seems that individuals either found a job or simply ran out of benefits.

Trichet’s parting words “We are in a global crisis” and “risks have intensified”, well not exactly his parting words, but stuck somewhere in the middle of his communiqué. The market is looking for hope and Trichet’s blunt stoic remarks did not ‘light anybody’s fire’, that has been left up to other EU policy makers who are relying on “perception’ to instill confidence. Trichet gave us and the banks additional longer-term liquidity and a promise to restart its covered bond buying. The ECB will offer banks one 12-month loan, starting in October, and a second 13-month loan in December. Both will be operated as fixed rate, full allotment operations. It will also start buying EUR40b of covered bonds in November. The ECB will continue keeping the possibility to reverse this year’s +50bp hike in its back pocket to be used if the economic outlook deteriorates further.

The BoE remains on the path to ‘shock and awe’. Yesterday, the Monetary Policy Committee eased policy more than was expected, increasing its asset purchase program by a further £75b (to a new total of £275b). Policy makers believed that the financial and economic stresses from periphery Europe, coupled with domestic fiscal tightening and dwindling domestic disposable incomes were enough reasons to ease policy further. In truth, the MPC has downgraded its expectations for growth in the coming year or so, and the recent GDP revisions mean it continues to see substantial spare capacity in the UK economy. The Bank has explicitly stated that it is not concerned that inflation is likely to rise to above 5%, y/y, in the coming month. They believe it is likely to fall very sharply through next year.

What we are witnessing is a glut of countries new QE backed programs racing to covertly devalue their own currencies before being accused of manipulation, and to fend of a credit crunch shutting down financial markets. It’s maybe a tad strong, but a reality….

The dollar is higher against the EUR -0.09% and CHF -0.10% and lower against GBP +0.45% and JPY +0.04%. The commodity currencies are stronger this morning, CAD +0.41% and AUD +0.28%.

Until yesterday Canadian investors had little domestic data to chew on this week. It probably would have been better if they still had none. Initially, the loonie weakened outright and depreciated against most of its major trading partners ahead of this morning Canadian jobs report after weaker data north and south of the border. By day’s end, risk loving crept back into the market and with commodity prices dragged the loonie into the black.

Monthly building permits plunged in August (-10.4%) led by scaled backed construction in Ontario. The accuracy of this release is questionable after the deep revisions to July’s release going from +6.3% to -0.4% decline. The IVY PMI continue to be in expansion territory at 55.7, however, some of the subindexes are a concern. The employment index for this month was at 47.5, indicating employment was lower than in the previous month. Price pressures remain with the price index at 61.9 this month.

In a risk aversion trading environment, the loonie, a commodity and interest rate sensitive currency, movements generally become over extended in one direction or another. A better-than-expected employment report on both sides of the boarder should boost risk appetite and give commodities a lift, allowing the loonie to back away from its 13-month lows. To date, the probability of a Greek default has been capable of keeping a lid on risk rallies. It’s all eyes down for the job reports (1.0397).

The AUD has maintained its four day old rally on optimism that European policy makers are moving to insulate banks from the region’s sovereign debt crisis, increasing demand for higher-yielding assets. European official’s and policy makers are stumbling about and at long last seem to be stepping up and taking ownership of the European debt crisis. The market is expecting the ‘creation of a new Euro rescue plan that will be positive for risk’.

For most of this week, it seems that investors and speculators have been liquidating long Aussie positions at a record pace, as the ‘underlying flow trend among long-term players had turned decidedly negative’ on the back of the Euro crisis.

On Monday, the RBA hinted at rate cuts, despite Governor Stevens leaving key rates unchanged at +4.75%. The Bank communiqué was very cautious on the outlook, leaving the door open for easing. The RBA concluded its policy statement by describing its current policy stance as appropriate, but nonetheless opened the door to an easing policy change stating that “an improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary.” FI dealers increased the pricing for rates cuts at the 1 November meeting by +18bps to +44bps.

It’s not a surprise to understand that the RBA is still being heavily dependent on how the crisis in Europe affects global growth over the next month. An increase in risk and cuts again will be off the table and visa versa. However, similar to other growth and commodity sensitive currencies, the market bias prefers to be better sellers of the AUD on rallies, until the panic flows have abated (0.9782).

Crude is lower in the O/N session ($82.04 down-0.55c). Oil rose for a second day as shrinking US crude supplies, better-than-expected economic data and signs Europe can control its debt crisis lessened concerns that fuel consumption will suffer.

The weekly EIA report showed that the US commercial crude inventories decreased by -4.7m barrels from the previous week. At +336.3m barrels, oil inventories are above the upper limit of the average range for this time of year. Total motor gas inventories decreased by -1.1m barrels are above their upper limit of the average range. Analysts were expecting crude gain by +2.5m barrels and gas stocks to move up by +1.30m barrels last week. Oil refinery inputs averaged +15.1m barrels per day during the week, which were +73k barrels per day below the previous week’s average as refineries operated at +87.7% of their operable capacity.

The old support levels now become the new key resistance points. Weaker growth predicted by the IMF, which points to lower oil demand, will have dealers thinking of shorting the market again. Expect investors to run into technical selling on some of these rallies.

Gold prices yesterday stayed close to home despite the toing and froing rhetoric from Global policy makers. Are we to trade the commodity as a safe haven? Are we to cash the profitable trade for margin requirements? Will the QE policies require a hedge against inflation? These are some of the question on why the commodity has been behaving in such an erratic manner this week. Trichet indicating that downside risks have intensified encouraged them to introduce covered bonds purchases and reintroduce yearlong loans for banks after keeping rates on hold yesterday due to heightened concerns over the prospect of a Greek default.

After last months rout, investors remain very cautious about this trade. In the last two weeks, gold has had one of its “steepest corrections in history, weighed down by a sharp margin increase, the fourth hike this year and heavy liquidation by hedge funds in a technically overbought market”. Demand for ‘physical’ gold is again expected to support the market. Under normal conditions, the Indian festival season helps drive buying from the world’s biggest gold consumer. Retail gold demand traditionally gains pace from August. The Fed’s efforts to drive interest rates lower to support lending should, by default, support commodity prices in theory ($1,654 up+$1.30c).

The Nikkei closed at 8,605 up+83. The DAX index in Europe was at 5,624 down-21; the FTSE (UK) currently is 5,264 down-28. The early call for the open of key US indices is higher. The US 10-year backed up +7bp yesterday (1.99%) and is little changed this morning.

Treasuries fell for a third day as speculation that EU policy makers are finally stepping up to the plate to resolve the debt crisis reduced demand for the safest assets. Longer term maturities backed up from their lowest yields in two years after Ben’s testimony in congress stated that the Fed has more ammunition in their arsenal and would implement it if need be to boost the US economy. The IMF indicating that the ECB still has room to maneuver after keeping rates on hold has pressurized the FI market.

This morning is NFP and even with yesterdays better than expected weekly claims print and midweek’s unchanged private payroll numbers, the market has been reluctant to get to far ahead of itself. To date, investors have been pricing in a double dip, and the possibility of us not going down that route will bring in sellers. This morning’s employment print will provide a big piece of jigsaw for the growth puzzle.

Under the $400b Operation Twist, the Fed has been purchasing long dated securities financed by selling the short end (yesterday they sold $8.75b Treasury coupons and had bids for +$242b). The program provides no liquidity, but is expected to lower longer term rates and hopefully kick start growth again in a stagnant US economy. Analysts guesstimate for 10-year yields is 1.50%.

Investor’s fearing that the US unemployment report could disappoint this morning will covet product on these pullbacks. In a low growth and deflationary environment, coupled with policy maker’s accommodative positions should keep global rates low for years.

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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