Printing press Smelling PIIGS dollar EURO and now NFP?

After this week, for some, trucking school looks attractive, while others seem to have invented their own printing press. ‘Big dollar’ liquidation has dominated, and speculating on the ideal pair should have been rewarding. After this mornings NFP release, Capital Market’s focus will begin to shift back towards the ‘smelling PIIGS‘, making the one directional bet a bit more difficult to cash-in on. After the data and rhetoric that has been force-fed to us this week, the market should witness a limited dollar impact from a moderately stronger jobs report. With the Fed fully committed to its QE2 program, at least for now, stronger-than-expected data will tend to support risk appetite and gains in growth, while weak data may be less helpful for risk appetite, but unlikely to generate an outright trade risk reversal.

The US$ is mixed in the O/N trading session. Currently it is higher against 10 of the 16 most actively traded currencies in a ‘volatile’ trading range.

Forex heatmap

Yesterday’s US Preliminary non-farm productivity happened to jump +1.9% in the third quarter, marking the sixth increase in the last seven-periods. The real output grew at an annualized rate of +3.0%, while hours worked rose +1.1%. The unit cost of labor, meanwhile, fell -0.1% and is -1.9% lower y/y. Compensation per hour has also jumped +1.8%, but, real-compensation per hour increased by a much smaller +0.4%. Analysts note that companies continue to focus on cutting expenses to boost profits. It’s the reason Bernanke said progress towards cutting unemployment and boosting growth was ‘disappointingly slow’. Last week’s unemployment claims rebounded unfavorably from the previous weeks three month low on Thursday (+457k vs. +437k). Digging deeper, on the plus side, the two-week average of +447k is slightly below the psychological +450k print. Continuing claims fell to +4.34m from the preceding week’s revised level of +4.382m. Meanwhile, and after showing a substantial decrease in the previous week, extended benefits surged up by a net +358k. Because last week’s drop in initial claims was not followed through this week, the jobs situation remains lackluster. Some dealers and analysts have been revising today’s NFP expectations down from the +60k print to +25k, keeping private sector employment the same along with the unemployment rate at +9.6%.

The opening statement from Trichet paints the same picture. The ECB has no immediate plan to change interest rates as officials gauge the impact of the Fed’s bond-purchase plan and the renewed tensions in the Euro region bond markets, specifically the periphery problem areas. Technically, they have signaled no immediate willingness to depart from their exit strategy. ‘The Governing Council continues to view the current key interest rates as appropriate’ and ‘expects price development to remain moderate.’ He ended his communiqué by stating that economic momentum in the region remains ‘positive’, although ‘uncertainty is prevailing’. It’s truly an art form to say so little with so much.

The USD$ is higher against the EUR -0.12%, GBP -0.35% and lower against CHF +0.08% and JPY +0.05%. The commodity currencies are mixed this morning, CAD -0.13% and AUD +0.09%. The loonie has underperformed against all of its major trading partners even as commodity prices register new medium term highs. This week the CAD had been waiting for its own event risk in the shape of PM Harper’s ‘yay or nay’ to BHP Billiton $40b takeover of Potash. The negative response has lead to unwinding of some speculative long CAD positions acquired in front of the deal. Until the Fed’s $600b announcement, the loonie, along with other commodity growth sensitive currencies, have enjoyed the strongest gains vs. the dollar over the past five trading days. Weaker Canadian Ivey PMI data (56.7 vs. 65.8) mixed with a bit of concern of Ben’s rhetoric of weakness of the US economy and Canada’s natural close ties will have the loonie underperforming other currencies strengthening bias vs. the US dollar in the medium term. This morning is all about North American employment numbers.

The AUD is staring down its second consecutive weekly gain on bets that the RBA will increase interest rates further even as the US and Japan leave borrowing costs near zero. Governor Stevens at the RBA said that economic growth will accelerate next year and ‘the Aussie’s advance will help slow inflation’. With the Australian economy continuing to grow ‘at or above trend and inflation remaining in the upper part of the band’ provides support for further monetary-policy tightening from the RBA. The currency trades at a strong premium to its US counterpart after Bernanke’s QE2 announcement. The interest rate differential and the issue of dollar liquidation favor commodity growth sensitive currencies. Australasian bourses and commodity prices in the black will favor the AUD over the longer term. The currency remains in demand on pull backs as the carry look attractive to investors (1.0134).

Crude is higher in the O/N session ($86.58 +9c). Commodity prices are going to be broken after Helicopter Ben’s announcement this week. Not to be left behind, oil prices rallied for a fifth consecutive day, printing new six-monthly highs, smashing the $85 barrier as the dollar plummets vs. all its major trading partners on US policy makers discreet intentions of keeping their currency in an underperforming state. The commodity has also received support after the weekly EIA report showed that fuel supplies plummeted when refineries reduced operating rates to the lowest level in seven-months last week. Crude stocks rose +1.95m barrels to +368.2m vs. an expected +1.5m barrel climb. Offsetting all of these gains was the gas inventories headline print. It fell -2.69m barrels to +212.3m, the lowest level in twelvemonths. Providing a leg up was the refineries operating at +81.8% capacity last week, the weakest print in seven-months causing the crack spread (crude into oil) falling -46% in that period. Technically, the decline in stocks is primarily due to the low production numbers been witnessed. Gas stockpiles were expected to be little changed from the previous report. Distillate supplies (heating oil and diesel) decreased -3.57m to +164.9m, providing the biggest drop in over two-years. The market remains wary that the underlying fundamentals have not changed. The ‘big’ dollars value continues to push the price about.

Gold aggressively advanced yesterday, along with most commodities, a day after the Fed’s buy more debt announcement, driving the greenback lower and boosting demand for precious metals as alternative investment. The fresh cash infusion is expected to aid the yellow metal over the longer term. Commodities should remain coveted on speculation that steps to support growth through QE and low interest rates will boost demand for the yellow metal as an alternative to some currencies, the store of value theme. A negative move for the dollar is bound to affect the yellow metal’s price. Last month, gold rose +3.7% while the dollar fell -2.2%. Investing in the gold market is becoming more a momentum play. Any pullbacks continued to be bought. For most of this year speculators have sought an alternative investment strategy to the historical reserve currency. Investors have been using the commodity as a proxy for a ‘third reservable currency’ and the reason for the record highs. The debasing fears of the dollar, coupled with the sustainable growth issues of the US economy has investors seeking protection in an asset with a ‘store of value’ ($1,387 +$4.60).

The Nikkei closed at 9,625 up +267. The DAX index in Europe was at 6,741 up +7; the FTSE (UK) currently is 5,861 -1. The early call for the open of key US indices is lower. The US 10-years eased 7bp yesterday (2.49%) and are little changed in the O/N session.
From here on in the market will be talking about specific areas of the curve now that the Fed has extended its bond buying program. Debt prices remain firm, led by gains in the belly of the curve, while the long-bond underperformed after the Fed’s asset-purchase program benefits ‘medium-term debt’. The FI asset class also found support after yesterday’s US weekly claims beat market expectations, dimming hopes for growth in this morning NFP release. Since yesterday, market revisions on prediction for the employment number are like a moving target.

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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