It’s Bernanke’s turn to take center stage!

Historically the 1st Monday after NFP ends up being the quietest trading day of the month. Will history be threatened today? We have now shifted from employment to the Fed taking center stage. The main event this week is the FOMC meeting, with the decision coming down on Wednesday. Capital Markets are now wondering if Bernanke and Co. will alter some of their negativity and provide a more upbeat view on the economy, perhaps they could be so bold and shift into neutral! This time will they explain an exit strategy? The market has been waiting for one, but, we may be asking for too many changes in one sitting!

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

Forex heatmap

It was a pleasant surprise, and we may look back and declare July 2009 was the month that the worst recession in 50-years ended. It was the month, where we saw the pace of US job losses slow more than forecasted and the unemployment rate drop for the 1st-time in over a year. As a stand-alone event the decline is still weak, but, it was well ahead of the consensus. Payroll’s managed to fall by -247k, after a -443k loss in June. The jobless rate unexpectedly slipped to +9.4% from +9.5%. However, the Obama administration is adamant that we will see that 10% psychological unemployment print by year end.
Unusual seasonal distortions played no role. This would have surprised almost all analysts. For instance, despite the unusual timing of auto-plant shut downs this year, seasonally adjusted employment in vehicle and parts was up +28k vs. a seasonally unadjusted print that was down -8k, leaving no real unusual effects in the July print from this sector. It was the best labor report this year and analysts are expected to revise down their estimates, as the remainder of the year ‘could’ show a marked improvement or will it?

The USD$ currently is lower against the EUR +0.09% and JPY +0.19% and higher against GBP -0.30% and CHF -0.07%. The commodity currencies are mixed this morning, CAD -0.01% and AUD +0.45%. It was ‘not’ worth waiting for, it definitely surprised and disappointed the market. Canada’s employment report was worse on both headline and detail. The headline (-44.4k vs. -15k) for both full and part-time jobs fell. The private decline was the worst in 6-months. Self-employment had another huge gain and people exited the workforce, driving a decline in the labor force (+8.6%). On the bright side, the pace of job losses is slower than the beginning of the year. But, the headline has managed to print -40k+ in 2 out of the last 3-months! Digging deeper, the report showed that full-time jobs fell by -29.1k, and part-time declined by -15.4k. The labor force shrank by -53.5k, which pushed the participation rate to 67.2%. What is most disturbing is that collectively the public and private sector lost -75k (the 10-consectutive monthly decline) was offset by the gain in self-employment (+34.8k). Combine this with the decline in commodities prices has pressurized the loonie. The general strength of the greenback on Friday took the whole market by surprise. For now, look for the CAD to finally catch up with the weaker fundamentals!

The AUD managed to strengthen from a 1-week low on the back of Asian bourses advancing on optimism that the global economy is recovering. This has stimulated the demand for higher-yielding assets. Last week we saw that the RBA’s next move could see policy makers hiking interest rates (+3%) as they scraped a prediction that the economy would fall into recession. For now the currency looks like a good buy on pull backs (0.8397).

Crude is lower in the O/N session ($70.88 down -5c). It’s finally dawning on traders that last week’s EIA report was actually bearish. Couple that with the USD aggressively advancing vs. the EUR after Friday’s jobs report has crude prices backing off from its 2-month highs. The EIA report showed a bigger-than-projected supply increase. The commodity’s rise of late has been rapid and technically over extended on the top side. The crude oil builds across the States and at Cushing (where West Texas is stored-+1.2m to +33.3m w/w), are weighing on the market. Demand destruction remains healthy as noted by industries reports contracting last month. This certainly does not bode well for any strong rebound in the coming months. Crude stocks increased +1.67m barrels, w/w, vs. an expected rise of +0.6m. Gas stocks declined -212k to 212.9m. The market was expecting a decline of -800k. Supplies of distillate fuel (including heating oil and diesel), fell -1.14m barrels to +161.5m, an increase of +1.23m was projected. Technically the market needs to break below $69 to gain any true momentum. Reality tells us that inventories are high, demand is still really weak and the risk is increasing that we will see a bigger correction towards $60. We are not seeing growth, but indicators are showing us a ‘less bad is good’ scenario. It’s worth noting that OPEC increased their output levels for a 4th-consecutive month in July (agreed compliance is slipping as some members states take advantage of the stronger prices).Their output averaged +28.39m barrels a day (up +45k, m/m). With the dollar soaring on Friday, investors were willing to lock in their profits for the yellow metal which managed to print a 2-month high last week. It continues to underperform this morning ($957).

The Nikkei closed at 10,524 up +112. The DAX index in Europe was at 5,418 down -40; the FTSE (UK) currently is 4,711 down -21. The early call for the open of key US indices is lower. The 10-year Treasury’s backed up 11bp on Friday (3.86%) and is little changed in the O/N session. Treasuries prices plummeted last week, recording the largest yield climb for 5-days in over 6-years. The stronger than expected employment data has persuaded investor’s to purchases riskier assets. This week the US government is to issue $75b of notes and bonds. At these lofty yields, will the market fight for the supply?

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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