NFP surprises over?

This has been a rough week for Capital Market traders. Despite global equities regaining a firm ‘toe-hole’, other asset classes have been difficult to trade. A failed UK Gilt auction and a $98b new US issue combined with a $7.5b quantitative US buy back kept FI traders busy. The FX traders were not left out in the cold, inter-day volatility was kept alive with ill-timed, ill-informed remarks from the ‘rookie’ US Treasury secretary and political posturing ahead of the G20 meeting next week.

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

Forex heatmap

An interesting set of US data yesterday, which definitely took some of the heat off the ‘current’ Treasury Secretary. Jobless claims may be breaking the cycle of NFP revisions. It seems that the rate of deterioration in US job markets may be stabilizing. Initial jobless claims came in +652k vs. an expected +649k. But, analysts point out that the pattern of upward revisions to NFP payroll reports is being broken, and that can only be good, we hope. Given that initial claims have been range-bound around the +650k mark for 5-weeks, suggest that this cycle of ‘not’ trusting the initial print on NFP (which has been all over the place) may be no more. It’s still disturbing that so many individuals continue to stay on extended benefits, as this does not help the unemployment rate (8.1%). Other data revealed that the 4th Q real-GDP weakened in the final report to -6.3%, q/q annualized vs. expectations of -6.2%. However, it remains the largest contraction in 27-years, with personal consumption (-4.3%), private investment (-23%) and net exports (-14%) contributing to all of the weakness. Inventories fell more than previously recorded (-$25.8b), which remains a -0.11% burden on economic activity rather than contributing +1.32% as posted in the advanced report. A real eye open was that corporate profits plunged -16.5%, q/q in the 4th Q (-21.5% y/y), this is the largest decline in 56-years, as businesses do battle with reduced consumer spending, export demand and private investment. Perhaps Geithner’s ‘weak’ dollar policy will kick in soon!

The USD$ currently is lower against the EUR +0.36%, CHF +0.09%, JPY +0.82 and higher against GBP -0.09%. The commodity currencies are weaker this morning, CAD -0.02% and AUD -0.65%. Yesterday was a whiplash trading day that saw the loonie initially gain vs. the USD by default as global equities and commodities rallied and give it back as the greenback rebounded by late afternoon. The loonie remains range bound. This week, the currency has been driven by the strength of commodity prices (50% of Canada’s total export revenue is commodity based. Canadian fundamentals remain weak and with little data of note this week traders have been at the mercy of equities and Fed headlines. It’s all about the big dollar, for now look to buy USD$ on pull backs as Canadian fundamental data does not support a stronger loonie.

The AUD$ advanced, hand in hand with Asian equities, all on the back of greater risk tolerance by investors who seek higher yielding assets for now. Rio Tinto (the world’s 3rd-largest mining group) believes that the metals markets will recover in the 2nd-half of this year. Commodities similar to Canada account for 55% of total exports. Traders are looking to buy on dips (0.6980).

Crude is lower in the O/N session ($53.83 down -51c). Despite demand destruction remaining healthy, optimism came up trumps yesterday. Crude prices encroached on its 4-month highs as advancing global equities ‘may’ signal that fuel demand will increase. Trading this commodity seems to be throwing out all the bearish data that we witnessed earlier this week and jumping into bed with this bear-rally equity market. The weekly EIA report showed that US inventories climbed to their highest level in 16-years as demand wanes. It was the 22nd gain in 26-weeks and left stockpiles 13% higher than the 5-year average for the period. Inventories rose +3.3m barrels, w/w, vs. an expected rise of +1.1m. This is another bearish report that requires demand to move higher for prices to at least stabilize, it will once again shift focus towards OPEC and further production cuts scenario. However, supplies of gas and distillate fuel (includes heating oil and diesel) dropped as refineries cut utilization rates. Gas stocks fell -1.14m barrels to +214.6m last week. The decline left stockpiles -0.4% lower than the 5-year average for the week. Combine this with Japan’s crude imports falling for a 4th –consecutive month last month on the back of weaker industrial output and Europe’s 3rd-largest producer (TOTAL) cutting its out put in the US just vindicates how weak the market is becoming. The fundamentals of supply and demand do not justify oil penetrating that psychological level of $60 a barrel anytime soon. Global demand destruction remains a concern; there is nothing to suggest that demand will increase in the short term. Crude prices could remain vulnerable unless the greenback continues on this path of weakness. The fear of inflation occurring on the back of the Fed’s plans to buy debt has investors wanting the ‘yellow metal’ on pull backs as an alternative form of investment ($937).

The Nikkei closed 8,626 down -9. The DAX index in Europe was at 4,259 down -1; the FTSE (UK) currently is 3,942 up +17. The early call for the open of key US indices is higher. The 10-year Treasury’s eased 6bp yesterday (2.74%) and are little changed in the O/N session. Treasury prices rallied despite global equities gaining some support and the Fed issuing 7-year product ($24b). The fact that the 1-month T-bills are trading negative for the first time since Dec. once again highlights the stresses of the market. Treasuries are adjusting to supply and the pick up in risk appetite, which is likely to be temporary. Traders remain concerned that government supply will exceed demand going forward. -However, yesterday’s 7-year auction was well received and eased the fears of a weak 5-year the day before.

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