NFP to play second fiddle to EURO crisis

What is NFP capable of bringing to the table? Better job news. Market consensus is around +100k with a +9.1% unemployment rate. The stronger ADP reading and the better employment component of the non-manufacturing ISM report earlier this week suggests an upside risk to this estimate.

The dollar is unlikely to get much lift from the release ‘directly’, as an inline print will not provide support. Results below the estimate are likely to be judged as a disappointment, in particular if the unemployment rate should have risen, providing for some week ending EUR profit taking.

On the flip side, Euro widening bond spreads are tightening monetary conditions in peripheral markets even further. This morning, the capital market is taking dead aim at Italy. The market seems to be playing catch up concerning them, having focused more on Spain these last few months. The Euro-zone crisis is no longer contained. NFP may be playing second fiddle!

The US$ is a stronger in the O/N trading session. Currently, it is higher against 12 of the 16 most actively traded currencies in a ‘subdued’ session ahead of NFP.

Forex heatmap

Stronger US employment data will make this morning’s NFP release that more interesting. Yesterday, US private business added a stronger number of jobs last month than expected (+157k). The consensus had anticipated the ADP to report a job gain of +95k, m/m. The surprise release suggests that US economic recovery may have found a new lease of life in early summer. The major difference between the two reports of late, despite ADP tallying up only the private reporting, NFP which includes government workers, has been laying off more individuals to close budget gaps. Before the ADP release, analysts had been predicting an NFP print of +100k. Expect this number to have been ratchet up a tad for this morning’s release. Last month’s unemployment rate is expected to remain the same at +9.1%.

Not to be left behind in the surprise category, US weekly claims finally improved after a month of similar filing behavior kept the average around +426k to +418k. Even the government shut down in Minnesota was not capable of weighing on the headline print. The seasonally adjusted decline (-14k) did little to the more accurate four-week average, which softened-3k to +425k, w/w. Analyst’s note that it would take a few extra weeks to smooth out the anomalies and have the average reduce. Digging deeper, continuing claims also improved, easing to +3.68m from +3.72m.

The dollar is higher against the EUR -0.51%, GBP -0.11%, CHF -0.57% and JPY -0.14%. The commodity currencies are weaker this morning, CAD -0.04% and AUD -0.06%.

FX markets seemed to ignore Canadian Ivey PMI yesterday (68.2 vs. 65.7), now considered second tier data. Investors are swayed more by equity and commodity movements. The loonie topped the currency 16 league table yesterday, strengthening after a stronger than expected ADP report from its largest trading partner and after gains in copper and crude prices made currencies linked to raw materials more attractive.

Earlier in the week, the CAD had been trading under pressure outright, after the Chinese government increased interest rates to cool its economy, temporarily sapping demand for higher-yielding currencies. Big picture, the overall general risk tolerance has improved over the last ten trading days and it was only a matter of time before the loonie found greater traction after outperforming mostly on the crosses.

This morning we get Canadian employment numbers. The market is expecting a headline print of +25k with no change in the unemployment rate (+7.4%). Depending on what NFP is capable of bringing to the table, the loonie will take its cue from the broader market sentiment heading into another weekend. Strong dollar support remains now reappears at 0.9509.

The AUD is heading for a second weekly advance, as a global rally in equities and commodities is supporting the demand for higher-yielding assets. Aussie domestic data has also been stronger this week. Employment rose +23.4k in June, more than the +15k consensus. Importantly, full time employment surged +59k and the employment rate at +4.9% held at just below the full employment rate. With the strong private investment outlook pointing to still robust trend employment growth, supports Governor Stevens concern that at some point, savings rates will fall and consumption will rise, pushing inflation above its target, allowing the RBA to be more hawkish.

Gains have been capped on fear that Greek austerities plan will not resolve Europe’s sovereign-debt crisis. Technically, the market is waiting for funding schedule clarity. Concerns that global growth is slowing has prompted some investors to bet that the RBA will cut interest rates some time this year.

Currently, the market is pricing a no hike in August unless both inflation and employment surprised on the upside and the situation in Greece clears up sufficiently for a powerful rebound in risk appetite (1.0763).

Crude is lower in the O/N session ($98.40 -0.27c). Oil prices have climbed after two new reports offered some positive news about US jobs (ADP and weekly claims). Previously, the commodity had backed off from its three-week highs after the PBoC raised interest rates and Moody’s downgraded Portugal’s credit rating. The weekly EIA report showed that crude inventories fell more than expected for a second consecutive week, suggesting that demand is improving.

US commercial crude stocks decreased-900k barrels to +358.6m last week, but remains above the upper limit of the average range for this time of year. Not to be left behind, gas inventories fell by-600k barrels, after decreasing by -1.4m in the prior week, and are in the lower limit of the average range. Oil refinery inputs averaged +15.3m barrels per day during the week, which were +68k barrels per day above the previous week’s average as refineries operated at +88.4% of their operable capacity.

The market is concerned that the ‘tightness’ in the oil market will continue to undermine the fragile global economic recovery. This is why the IEA and its members agreed to release crude from their SPR’s to ease some of this market tension. This year’s energy spike is being cited ‘as the reason for the global economic slowdown. Analyst’s note, that from its peak, crude is off-20% and from the IEA announcement down -1.1%. Releasing that special supply is not deterring the speculators.

Gold prices remain elevated as interest-rate increases heighten concern that the global economy may slow and as the European sovereign debt crisis increased demand for the metal as a haven. A rate hike from China and the Euro-zone put inflation concerns back in the spotlight and as US debt issues lifted the yellow metal’s ‘safer’ haven appeal. The PBoC and ECB are clearly stating that ‘taming inflation is a top priority even at the expense of their economies slowing gently’.

In real terms you are not making any money by just holding cash, so there is demand for gold as a store of wealth. The stronger dollar could stall a prospective rally if there is a persistent flight to safety or the correlation between the two asset classes becomes positive, somewhat similar to the scenario of two-years ago.

Longer term, weaker global fundamentals are expected to support this crowded trade during the second half of the year. The commodities dependency on the buck and the outlook for US rates is likely to remain a supporting factor. This ‘one directional trade’ is far from over, with speculators continuing to look to buy the metal on these deep pullbacks until proven wrong ($1,527 -$3.30c).

The Nikkei closed at 10,137 up+67. The DAX index in Europe was at 7,502 up+31; the FTSE (UK) currently is 6,061 up+12. The early call for the open of key US indices is higher. The US 10-year backed up 5bp yesterday (3.15%) and is little changed in the O/N session.

This has been a seesaw week for US yields. The 10-year benchmark managed to drop to their lowest level intraday midweek after China hiked their lending rate for the third time this year, to contain inflation, spurring concern that economic growth will slow. Generally, any tightening by China is deemed negative for the world economy if they are trying to slow down growth.

Yesterday’s US employment data happened to push yields to again test this week’s highs after US companies added more jobs than forecasted and weekly claims fell for the first time in three-weeks, spurring speculation that US economic recovery is picking up momentum. Of course, proof will be in the pudding in this morning’s NFP report.

A JPM survey shows no FI longs for the first time since February 2005 and only the third time in its 20-year history. Incredibly, 75% of their client base is neutral, the most since last April. The US government announced that it will issue $32b 3’s, $21b 10’s and $13b 30-years. With the completion of the Fed’s QE2 program increases the available supply of debt to the market, which may add additional pressure for rates to back up even further. For a considerable time, the Fed have been the only buyers of product!

OANDA Top 100 Trader StatisticsOANDA Order Book

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