US Treasury yields support the dollar index on Easter Monday

With half the trading world on holiday, it’s been a slow news day with filler trying to generate enthusiasm after the US’s somewhat solid employment report on Friday. Even Geithner has decided not to create any waves with China, delaying ‘the currency report’ scheduled to be presented to congress next week. It seems that the exchange rate policy accusations are to remain on hold. Conspiracy theorists will argue that this could be good news for the US debt supply this week. After the lack of participation in the last auctions, the US could do with all the help it can get. Higher Treasury yields are boosting the dollar index. Investors will be expected to support equities and commodities today. The lack of liquidity may dissuade some participation, but direction remains the same.

The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in a ‘subdued’ holiday trading range.

Forex heatmap

Finally, last Friday we got to witness US job growth. The highly anticipated NFP report recorded modest +162k new jobs, slightly softer than expected, but, a solid census-less effect led by the private sector. This certainly reinforces a ‘debate’ for withdrawing the ‘exceptional amount of liquidity’ in the months ahead. Even as early as today, the market anticipates the Fed to hike the discount rate again. If so, this will provide further proof that the end of low interest rates has to be insight. The reports break down saw that private sector jobs were up by +123k, public +39k, federal +48k, while state and local government happened to shed -9k positions. The unemployment rate was unchanged at +9.7%, as the labor force climbed enough to offset the rise in employment. Analysts note, that this month’s unknown variable, the census worker (+48k), is expected to have a bigger effect over the coming months. The ex-census print of +114k remains respectable. Various corners have tried to explain away some of the optimism by stating that the weather probably played a bigger role than expected. They believe that hiring in Feb. was deferred into Mar. because of the ‘blizzards’. On paper, the number of individuals unable to work due to the weather variable was only ‘slightly higher than an average Mar.’ Thus, distortions are not an excuse. Making the report stronger was the number of hours worked, rising +0.4%, m/m, surprisingly, the average hourly earnings fell -0.1%. Finally, the revisions were a bonus with Feb. losses revised lower (-14k vs. -36k) and +62k jobs were added to other months.

The USD$ is higher against the EUR -0.12%, GBP -0.16%, CHF -0.08 % and lower against JPY +0.06%. The commodity currencies are a tad stronger this morning, CAD +0.27% and AUD +0.12%. Forget infinity, forget parity, Canada is staring at a ‘premium’ to its southern neighbor. Commodities, equities and every piece of economic data cannot trip up the currency’s momentum presently. Everything the global economies want, Canada has it. This one-directional oversaturated trade has lemmings counting the profits. Domestic data continues to surpass all expectations. Last week, Canadian m/m growth (+0.6% vs. +0.5%) signals a robust recovery with key elements pointing towards a compounded growth rate of almost +8%. It appears that growth rates are coming in much stronger than Governor Carney and his policy makers expected. In Jan. they pegged 1st Q growth at +3.5%, the market is looking for something in the range of +5.5%. With data like this, it’s difficult not to love the loonie. Perhaps Canada has finally adjusted itself to living with parity. To date the USD rallies have been shallow and are met with strong resistance. The trend remains your friend.

It seems that investors and analysts are divided on whether Governor Stevens at the RBA will hike rates again tomorrow (+4.00%). Futures traders are pricing in a +54% chance of a fifth hike in six meetings. Weaker fundamental data out of Australia last week has been able to slow the pace of acceleration of their domestic currency. Firstly, the Australia’s trade deficit (-1,92b vs. -1.34b) widened more than analysts expected last month, as ‘miners imported equipment needed to meet surging Chinese demand for commodities’. Secondly, the manufacturing index slipped -3.6 ticks to 50.2 on fewer new orders for consumer goods in Mar. A weaker expansion among manufacturers may give Governor Stevens the ammo to ‘slow the pace of interest rate increases’. However, last week again he reiterated that Australian house prices were ‘getting too high’ and it is important to return interest rates to normal levels. On the one hand it seems that the RBA is getting the job done as the interest-rate increases are cooling domestic demand. The market should expect the AUD to remain somewhat under pressure on rallies until the announcement (0.9202).

Crude is higher in the O/N session ($85.42 up +55c). There are a number of reasons that have kept crude prices afloat these two weeks. Firstly, strong global fundamentals have favored most commodities. Secondly, the US employment data last Friday is a ‘solid report’ that this economic recovery is sustainable. Crude gains have been contained somewhat due to the weekly inventory reports and holiday trading weeks. Last week’s EIA report showed that crude stocks rose by +2.9m barrels to +354.2m. The market had been expecting an increase of +2.4m. The surprising factor in the report was that gas inventories recorded a modest gain, unlike the previous couple of weeks. Stocks increased +313k barrels to +224.9m w/w vs. a forecasted decline of -1.85m barrels. Other reports showed that OPEC’s crude-oil production slipped from a 14-month high last month. Technical analysts have their eye on $90 by year end.

There is nothing like stronger fundamentals to give commodities a boost. Global equities are expected to push higher as economic report after economic report exceeded most analysts’ expectations. So far this month the yellow metal has continued last month end, quarter end momentum as some investors seeks an alternative to currency investments. However, last Fridays NFP release may conjure up a ‘new’ trading scenario. Fundamentally, it’s been expected that the ‘yellow metal’ would find stronger traction as investors seek an alternative to an ‘on going weakening’ of the EUR and low interest rates. The dollar’s direction remains the strongest indicator to wanting the metal or not ($1,126).

The Nikkei closed at 11,339 up +53. The DAX index in Europe was at 6,235 up +82 (holiday); the FTSE (UK) currently is 5,744 up +65 (holiday). The early call for the open of key US indices is higher. The US 10-year backed 7bp on Friday (3.94%) and is little changed in the O/N session. Treasury yields rose to the highest level in 10-months as the NFP report revealed that the US added the most jobs in 3-years. It seems to have increased expectations that the economic recovery is sustainable and will make it interesting for the $82b of new issues in the US this week. Expect supply and rumors of a discount hike to dominate trading as traders prepare to make room to take down the auctions (3’s-40b, 10’s-21b and long-bond-13b). Last month, the government supply was a bearish factor for bonds as interest waned at lower yields. Ten-year yields are now technically eyeing 4%.

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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