Ahead of NFP, dollar ranges

What a first week of the New Year we have witnessed, and we still have NFP numbers to look forward too. Iceland is threatening to pay no-one. Technically they are broke, and are on the verge of defaulting. Greece has European forensic accountants going through their books. ECB member, Stark, implied that Europe would not be in a position to save them. The UK Labor party botched their back-stabbing attempt of PM Gordon Brown. The world will have to endure him until ‘the’ election. One of PM Hatoyama’s only experienced ministers has stepped down for health reasons and a new Japanese Finance minister Naoto Kan has been appointed, the sixth one in 18-month. The PBOC have pushed Bill yields higher, a signal of tightening. Their focus for this year is to control the record expansion in lending and curb price increases. Most of Europe is shut down because of severe winter conditions. It is expected to last for weeks and has managed to bid up the price of oil despite bearish fundamental reports. Yesterday’s FOMC minutes reveal a crack in unity and timing. Despite all this, traders eagerly wait for tomorrows NFP print, where many now believe that we will achieve a small positive print.

The US$ is stronger in the O/N trading session. Currently it is higher against 15 of the 16 most actively traded currencies in a ‘whippy,’ trading range.

Forex heatmap

Yesterday’s ADP was very much in line with markets expectations (-84k vs. -75k). In fact it managed to actually record the fewest number of job losses in 19-months. The rate of change remains on a sharp ‘upward’ trajectory that has been in place since the worst rates of job losses last year. Some analysts now believe that private employment will begin to rise within the next few months. All bodes well for tomorrows NFP headline print. Many economists expect a positive print with the worst case scenario being flat. Digging deeper into the report, small US firms lost -25k, medium shed -25k while large firm respectively pared -34k jobs. Despite larger firms having the biggest losses, they however only represent 16% of the workforce while small firms represent +44% and medium firms +39% respectively. While the number of private sector jobs continued to decline, the bulk of the losses was in the goods-producing sector (-96k) as the service sub-sector had its first increase (+12k) in nearly two-years. It’s worth noting that the previous 2-month revisions for Nov. and Oct. ended up being close to a zero-sum game.

A tad disappointing was yesterday’s ISM non-manufacturing PMI print. At 50.1 vs. 48.7, the sector is expanding, barely, suggesting that growth remains sluggish however. When digging deeper, one notices that the details were also mixed. The sub-category of business activity improved while new-orders continued to deteriorate. Despite this, the final prints continue to point towards expansion. Interestingly, the employment index improved last month, but remains below that psychological 50 mark as suggested otherwise by the ADP report. New-export orders also contracted after two months of expansion, while on the flip side, imports rose to 52.5 after two months at 46.0. Finally, prices paid accelerated, suggesting that business margins continue to be pressurized.

The USD$ is currently higher against the EUR -0.34%, GBP -0.65%, CHF -0.46% and JPY -0.35%. The commodity currencies are mixed this morning, CAD +0.20% and AUD -0.06%. It seems that the CAD needs no data to get a leg up. Robust commodity prices are pushing the currency along and into BOC Carney less than comfortable zone. They next meet on Jan 19th and do not be surprised to have him comment on the currency strength impeding economic growth. We all know that commodity prices and the loonie go hand-in-hand. With oil prices remaining elevated, despite a bearish inventory report yesterday, has pushed the CAD to print its strongest level in nearly 15-months. The loonie ended last month officially posting its biggest yearly gain in 2-years vs. its southern neighbor as the Harper led country recovers from the recession pushing the currency closer to parity with the greenback. If everything remains equal, trading at a strong premium within 8-months remains a viable reality. One cannot ignore that Canadian fundamentals remain strong and that emerging countries demand for commodities, which Canada has abundance of, can only support the currency in the long run. Financial and Political (for the time being) stability continue to support the currency. With a stronger risk tolerance, speculators are better buyers of the currency on any USD rallies in the short term. Tomorrow we have Canadian employment reports. They have managed to be an eye-open at every release in the 4th Q. Tomorrow should be no exception.

Surprisingly, Australian retail sales aggressively rose in Nov. (+1.4% vs. expectations of +0.4%), printing the largest increase in 8-month. This will surely keep the RBA on their toes regarding tightening monetary policy again. To date they have led the world in rate hikes (three in total) since Sept. Governor Stevens last raised rates at the beginning of Dec. by 25bp. Speculators are again pricing in another rate hike sooner than later. Futures are now predicting that there is a +58% chance that Aussi O/N lending rates will reach +4% by the beginning of Feb. Despite rates chatter, robust commodity prices continue to give the currency a leg up. Expect to see better buying of the currency on pull backs to remain (0.9185).

Crude is lower in the O/N session ($82.72 down -46c). Despite the weekly supply print side swiping market expectation, the black stuff, for the time being at least, is making an assault on its 14-month high. With the greenback dropping vs. the EUR yesterday fuelled investor appetite for commodities as an alternative investment. Surprisingly, US crude inventories rose last week for the first time in a month, vs. the consensus of a draw down on stocks. Crude stockpiles increased by +1.3m barrels to +327.3m vs. an expected -300k decline. This is in stark contrast to the earlier API report which reported a -2.3m drawdown. This report has reversed a four week trend of draw-downs. There was a similar story with gas whose stockpiles grew by +3.7m barrels to +219.7m vs. an expected increase of only +300k barrel. Distillate stocks (include heating oil and diesel) fell by -233k barrels to +159.0m. The market had been expecting a decline of -1.8m barrels. Refining capacity utilization fell -0.4bp to +79.9%, its lowest level in 5-weeks. Despite the weekly report being bearish for crude prices, investors are not focusing wholly on market fundamentals, but on the value of the dollar for the time being. Technically, when this immediate cold snap improves fundamentals will finally get to weigh on prices. Forecasts for below-normal temperatures through mid-Jan. are expected to erode some of fuel stockpiles. For the immediate future any pull backs in gas or oil prices remain better bid. Year-to-date, oil has climbed +2.9%.

The recent ‘yellow metal’ scenario remains the same. Yesterday the commodity managed to print a fresh three week high as a weaker greenback boosted the demand for the commodity as an alternative investment. Despite the dollar rebounding somewhat in this morning’s session, the commodity continues to hold its own ground. In the month of Dec., the gold depreciated approximately -12% after printing a record high of $1,227. Yesterday it rallied just under +2% ($1,136) and maintains its bullish trajectory.

The Nikkei closed at 10,681 down -49. The DAX index in Europe was at 5,971 down -55; the FTSE (UK) currently is 5,514 down -16. The early call for the open of key US indices is lower. The US 10-year bond backed up 5bp yesterday (3.83%) and are little changed in the O/N session. Treasuries fell for the first time in three days as some Fed policy makers voiced their concerns that more stimuli ‘might become desirable’. Also providing price pressure is the upcoming announcement of next week’s note and bond auction sizes. Already this week, US data showed that growth reports were not as strong as some traders had hoped or expected. Despite economic growth, growth overall remains muted along with inflation and in the short term will provide a bid on deeper pull backs for the asset class. Now we wait for tomorrow’s employment reports.

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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