Forget PPIP its G20’s PPC-Public Private Capitalism!

G20 is attempting to rewrite the ‘rules of capitalism’ to address an ‘integrated world economy that has outgrown the ability of individual governments to keep it in check’. We got a consensus and only time will tell. There are certain loop holes in their proposals, for instance WTO is to report quarterly on protectionist measures, the US has never conformed to the WTO-ever! Ah well, it’s off to New York in Sept. Will NFP and a higher unemployment rate this morning undo some of yesterday’s optimism? Market expects -650k-700k and an unemployment rate of +8.5%, any negative surprises and we will unwind some of yesterdays work.

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 ‘subdued’ trading range ahead of the mighty NFP.

Forex heatmap

Consistency is a given at the ECB, but not consensus! Trichet and his policy makers remain ‘unpredictable’. Yesterday and what seems to be the norm, they surprised the market by easing less than what was priced in and expected. The cut both the refinancing rate and deposit rate by 25bp to +1.25% and +0.25% respectively. Trichet said policy makers are ready to lower their benchmark interest rate even further, while the deposit rate has probably reached its floor. In effect they were less aggressive in their actions as they try and find some sort of consensus on what new measures to take next as rates approach zero. Even though they are guaranteeing monies they are not buying corporate and government bonds, which is pumping money into the system like the BOJ, BOE and the Fed. But, he expects to announce in ‘full details’ of ‘possible’ further quantitative measures next month.

The jobs market in the US is getting worse. It continues to deteriorate by the increasingly weaker initial jobless and continuing claims numbers. Companies remain in firm firing mode. Last week’s claims print of +669k was the highest in 26-years. Even bleaker, continuing claims surged to the upside, soaring above +5.7m vs. an expectation of +5.5m. These increases are very much in line with the private ADP report earlier this week. Market consensus expects the unemployment rate in today’s NFP to be +8.5%, however a higher number is not without possibility as we witness record claims week after week. We remain on course for a double digit number by year end.

Other data surprisingly showed that US factory orders had risen for the 1st-time since Aug. (+1.8% vs. -3.5%). However, Jan.’s report was revised down aggressively from -1.9% to -3.5%. Digging deeper, one notices that both durable and non-durable goods accounted for this increase with non-defense orders (ex-aircrafts-too volatile) rising +7.1% m/m (the largest monthly gain in 5-years).

The USD$ currently is higher against the EUR -0.09%, GBP -0.06% and JPY -0.27% and lower against CHF +0.03%. The commodity currencies are mixed this morning, CAD +0.03% and AUD -0.44%. An about turn for the loonie as G20 consensus encouraged investors to seek higher yielding currencies and commodities, thus turning their back somewhat on risk aversion strategies. With crude appreciating more than 3% yesterday and 50% of commodity revenues being exported, the CAD was bound to find some traction and print its highest value in over a week. Investor appetite for riskier assets seems to have increased as policy makers slash interest rates to improve lending conditions amid a worsening global recession. We will have to see if the momentum remains after this morning’s NFP data.

The AUD has advanced this week for a number of reasons, global optimism, higher equities and commodity prices, but more importantly it advanced after its trade surplus (+1.5b vs. +$0.7b, m/m) widened which added to optimism that the worst of the world recession may be ending. Australians will receive further economic stimulus in next month’s budget (0.7159).

Crude is higher in the O/N session ($53.46 up +82c). The bullish price action of Crude over the past two trading sessions has a large percentage believing that the world has already experienced the worst. Oil rose the most in three weeks yesterday as leaders at the G20 agreed on measures to fight the global recession. Prices also got a leg up as the EUR rallied vs. the greenback, thus boosting the appeal of commodities as an alternative investment. We seem to be shaking off all the bearish data of late and relying on our optimistic nature to drag prices higher. Earlier in the week crude prices fell after the EIA report showed that US stock levels rose to a 15-year high as this global recession continues to curb demand. It was the 23rd gain in 27-weeks. Inventories climbed +2.84m barrels to +359.4m last week vs. an expected increase of +3m. Most surprising was gas supplies, which unexpectedly rose by +2.23m barrels to +216.8m w/w. Optimism about the positive G20 outcome will have ‘bear traders’ questioning if we may have seen the low. OPEC’s secretary general El-Badri said yesterday that despite fundamentals remaining the same he hopes that the market has bottomed out, but realizes that ‘demand remains slack’. Gold was not immune to this new found optimism, yesterday it fell the most in a week on speculation the global economy will improve, thus eroding the appeal of the ‘yellow metal’ as a safe haven ($901). Apparently there are no inflationary concerns now!

The Nikkei closed 8,749 up +30. The DAX index in Europe was at 4,412 up +30; the FTSE (UK) currently is 4,123 down -2. The early call for the open of key US indices is higher. The 10-year Treasury’s backed up 11bp yesterday (2.77%) and are little changed in the O/N session. Treasury prices came under renewed pressure yesterday as the G20 agreed on a financial regulatory blueprint and pledged more than $1t in emergency aid to the IMF and World Bank. With global equities getting a boost, expect investors to seek higher yield before they buy the FI asset class in the short term. US debt sales of approximately 2.5t will certainly outweigh their buy back policy that has been trying to keep long dated rates down. However, the market needs to embrace itself for the time when no-one will need supply any more and we witness a failed US debt auction!

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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