‘Tepid’ Trichet to disappoint again?

New Zealand cut rates by 150bp, this followed Australia, who eased 100bp earlier this week. Expectations are that the Bank of England will also cut rates by 100bp this morning. As per usual it is the ECB that seems so reluctant to ‘go deep’. What ever scenario, a neutral 50bp cut, a tepid 25bp or an aggressive one full percentage point, the EUR will come under pressure just like Sterling has this morning.

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

Forex heatmap

Yesterday’s US ADP employment report showed a -250k decline in private payrolls last month, which was weaker than analysts had expected (-205k). This provides further evidence of a weakening labor market that supports a larger than -300k decline in NFP headlines tomorrow. Superimposing the data we are probably bracing ourselves for a -350k handle, which would not be a huge surprise to the market. Jobless claims have increased to around +520k in Nov. from around +470k in Oct. The breakdown of the report showed extreme weakness in all the main components. Private payrolls fell by -79k in small companies (up to 50 employees), by -130k in medium-sized companies (50-499) and -118k in large companies. Across the main sectors, private payrolls fell by -118k in manufacturing and -92k in the services sector. The US services sector contracted more than expected yesterday and is very much in line with Monday’s manufacturing numbers (37.3 vs. 36.2). Digging deeper one notice’s that prices are falling rapidly from a June high of 84.5 to 36.6. It’s not necessarily deflation; analysts believe it’s a correction from a ‘temporary’ summer spike. Foreign demand continued to prop up new orders in Oct., but Nov. showed a large contraction in export orders, surpassing the drop in new export manufacturing orders to 41.0. Without support from abroad it’s only natural to assume that business activity will likely weaken even further. By default this will continue to weigh heavily on employment (-10 points to 31.3).

Markets expect the ECB to cut interest rates by 50bps this morning for the 3rd month in a row to help kick start the economy. But, many analysts see a 75-100bp cut to be more appropriate. Trichet and Co. need to win the race against ‘disinflation’. If they are not aggressive enough the Euro-zone could experience a Japanese style scenario of soaring ‘real’ interest rates, high debt burdens and consumers continuing to postpone spending, which will lead to a ‘deeply’ depressed economy. It’s a foregone conclusion that the BOE will be more aggressive that the ECB, their economy needs them to be. Historically ECB policy makers tend to be more conservative in their actions and certainly more transparent in their methods.

The US$ currently is higher against the EUR -0.92%, GBP -1.73%, CHF -0.42% and lower against JPY +0.56%. The commodity currencies are weaker this morning, CAD -0.86% and AUD -1.12%. The loonie had it worst day in two weeks yesterday as unsettling political rumblings in Ottawa could force PM Harper to suspend Parliament to stave off defeat at the hands of a united opposition. Technically traders are looking for a 1.3000 print again in the short term; of course all of this will depend on tomorrow’s North American employment numbers. Canadian employers are expected to shed -20k jobs last month. With commodity prices continuing to take a beating, it’s only a matter of time before the loonie again makes a major assault on the yearly highs. The 6-month fall off in oil prices has managed to have a negative effect on the sentiment of the Canadian dollar. The black stuffs prices are now trading close to new 3-year lows. Crude accounts for approximately 10% of all of Canada’s export revenues. Governor Carney last week said ‘that the risks to the country’s economy from a global credit crisis and recession have increased in the last month and will probably lead to a further reduction in interest rates’.

The AUD dollar has remained better bid on pull backs as investors continue to speculate that Cbank interest rate cuts around the world will bolster economic growth. Economic reports this week have shown that the Australia’s economy grew at the slowest pace in the 3rd Q in over 7-years (GDP +0.1 vs. +0.2 q/q). This has occurred despite the aggressive monetary easing by the RBA over the last few months. This week the RBA lowered interest rates by 1% to 4.25%, the 4th cut since Sept., they objective like any other Cbank is trying to avoid a recession. To date they have slashed rates 300bp and analysts expect another 75bp ease by Mar. of next year (0.6442). As expected RBNZ slashed its O/N borrowing costs by a record 1.5% points to 5% to help guide the economy out of it worst recession in nearly two decades. Governor Bollard said that ‘policy is working together with the depreciation of the NZD and fiscal stimulus to create the conditions for some rebound in growth’ (0.5311).

Crude is lower O/N ($46.10 down -69c). Surprisingly crude oil prices rose yesterday after the weekly EIA report showed that inventories declined for the first time in 10-weeks as refinery operating rates and imports tumbled. Stocks fell -456k barrels to 320.4m, w/w, vs. an expected weekly rise of +1m barrels. Refineries unexpectedly cut operating rates, and imports dropped -13% also contributed to jump in the black-stuffs prices. With overall demand remaining weak, refiners are making a concerted effort to reduce stocks. Technically they are slashing deliveries to keep stocks from accumulating. Refineries are operating at 84.3% of capacity, down -1.8%, w/w. It is the biggest one week declines since Sept. Consumption averaged +19.6m barrels a day, that’s up +0.6% from last week and down -5.7%, y/y. Comments from Qatar oil minister also lent a helping hand. Al-Attayah said that OPEC will ‘definitely’ cut output at its next meeting in Algeria on Dec. 17, after postponing a decision last month. He reiterated that the group wants prices between $70 and $80 a barrel, a desired level at which one can invest. OPEC decided last weekend to defer reducing production until its next meeting. They will use the time to gage October’s -1.5m barrel cut in production. Gold prices eased in the O/N session as the greenback traded close to its weekly highs ahead of the ECB rate announcement this morning. It has reduced the appeal of the yellow metal as an alternative investment ($769).

The Nikkei closed 7,924 down -80. The DAX index in Europe was at 4,684 up +117; the FTSE (UK) currently is 4,250 up +80. The early call for the open of key US indices is higher. The 10-year Treasury yields backed up 1bp yesterday (2.67%) and are eased 12bp in the O/N session (2.55%). Treasuries prices fell for the first time in a week yesterday despite weaker than expected economic data out of the US yesterday. Traders had believed that this week’s rapid rise in FI prices that let to record low yields prints has occurred too quickly. The unsustainable rally saw traders paring back positions and booking some profits ahead of interest rate announcements out of Europe. With global equities finding little traction, expect investors to remain better buyers on pull backs as ‘risk aversion’ trades become the norm as the recession deepens.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

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