The technicals for the USD remain wishy washy for both bears and bulls as the market awaits House debates on the Obama/Republican tax deal and whether the Chi. What are the implications as we approach the last real trading week of the year?
Australia Employment Report
A recent rash of shaky data out of Australia was swept overboard by a ridiculously strong employment report from Down Under. Australia added more than 55k new jobs in the month of November, the per capita equivalent of a half million or so payroll additions in the US. And the October number, already positive, was revised 8k higher. This puts a significant focus on any signs of wage pressures as the economy effectively nears full employment. Q3 GDP was disappointing – the weakest in over two years – and a number of surveys suggest a weak trajectory outside of the mining sector, but that is a very important sector, especially with materials prices arching to record highs recently (copper and PM’s), so the data puts the market back on watch for another rate hike to 5.0% at one of the coming RBA meeting. The December 2011 STIR future has seen the market price in about 20 more bps of tightening than was predicted late last week. As an aside, the longer the mining boom continues, the more it risks distorting Australia’s already very imbalanced economy.
A recent rash of shaky data out of Australia was swept overboard by a ridiculously strong employment report from Down Under. Australia added more than 55k new jobs in the month of November, the per capita equivalent of a half million or so payroll additions in the US. And the October number, already positive, was revised 8k higher. This puts a significant focus on any signs of wage pressures as the economy effectively nears full employment. Q3 GDP was disappointing – the weakest in over two years – and a number of surveys suggest a weak trajectory outside of the mining sector, but that is a very important sector, especially with materials prices arching to record highs recently (copper and PM’s), so the data puts the market back on watch for another rate hike to 5.0% at one of the coming RBA meeting. The December 2011 STIR future has seen the market price in about 20 more bps of tightening than was predicted late last week. As an aside, the longer the mining boom continues, the more it risks distorting Australia’s already very imbalanced economy.
Down with the Fed!
A survey conducted by Bloomberg suggests a rising popular awareness of the Fed and dissatisfaction with its dirty deeds. An absolute majority now believes that Fed powers should be curtailed (39 percent) or that it should be abolished entirely (16 percent). So much for Bernanke's charm offensive! See the results of the survey here. While we can’t imagine that the average person has any deep understanding of the Fed’s role in the economy, the rising profile of the Fed among the population will mean that politicians will smell plenty of opportunity for a scapegoat once things turn sour again as the US grapples with its debt demons. On a similar note, Ron Paul, the famed libertarian Republican congressman from Texas and author of a book entitled End the Fed confirmed . 2011 is going to be a very interesting year for the Fed as Bernanke’s seat is getting unbearably hot. All of this points to a declining room for maneuver for the Fed, which is unlikely to be able to launch any new form of QE under the new Congress unless a full blown crisis is underway.
A survey conducted by Bloomberg suggests a rising popular awareness of the Fed and dissatisfaction with its dirty deeds. An absolute majority now believes that Fed powers should be curtailed (39 percent) or that it should be abolished entirely (16 percent). So much for Bernanke's charm offensive! See the results of the survey here. While we can’t imagine that the average person has any deep understanding of the Fed’s role in the economy, the rising profile of the Fed among the population will mean that politicians will smell plenty of opportunity for a scapegoat once things turn sour again as the US grapples with its debt demons. On a similar note, Ron Paul, the famed libertarian Republican congressman from Texas and author of a book entitled End the Fed confirmed . 2011 is going to be a very interesting year for the Fed as Bernanke’s seat is getting unbearably hot. All of this points to a declining room for maneuver for the Fed, which is unlikely to be able to launch any new form of QE under the new Congress unless a full blown crisis is underway.
Chart: USDCAD
USDCAD remains below its 21-day moving average, which has been an interesting swing indicator in recent months. While interest rates have rebounded sufficiently in the US to argue that the pair should be pushing higher at the critical 200-day moving average again, the focus seems to be equally on equity prices and crude oil, both of which have been on the up and up lately. If new highs in the US equity market hold here and crude arches back above 90 dollars a barrel, it’s hard to imagine that the pair won’t at least see an attempt below parity, the recent dovish BoC guidance notwithstanding. Tomorrow we get Oct. trade numbers from both the US and Canada.
USDCAD remains below its 21-day moving average, which has been an interesting swing indicator in recent months. While interest rates have rebounded sufficiently in the US to argue that the pair should be pushing higher at the critical 200-day moving average again, the focus seems to be equally on equity prices and crude oil, both of which have been on the up and up lately. If new highs in the US equity market hold here and crude arches back above 90 dollars a barrel, it’s hard to imagine that the pair won’t at least see an attempt below parity, the recent dovish BoC guidance notwithstanding. Tomorrow we get Oct. trade numbers from both the US and Canada.
Looking ahead
Watch the debates today in Congress over the tax deal hammered out between Obama and the Republicans. Many Democrats in the House are furious that Obama has turned his back on some of the promises made in his campaign and many embittered liberal Dems who are on their way out (as well as Blue Dog Democrats who are considered budget hawks) may vote against the bill. The market is certainly not prepared for this, though we’re not sure whether this protesting faction and the minority of Republicans against the deal because it didn’t go far enough are enough of a majority to threaten passage of the new deal. Any failure to pass the deal would be very supportive of the USD, as this deal represents a disturbing sign that the US is unwilling to change its policy of total fiscal irresponsibility until forced to by a crisis.
Watch the debates today in Congress over the tax deal hammered out between Obama and the Republicans. Many Democrats in the House are furious that Obama has turned his back on some of the promises made in his campaign and many embittered liberal Dems who are on their way out (as well as Blue Dog Democrats who are considered budget hawks) may vote against the bill. The market is certainly not prepared for this, though we’re not sure whether this protesting faction and the minority of Republicans against the deal because it didn’t go far enough are enough of a majority to threaten passage of the new deal. Any failure to pass the deal would be very supportive of the USD, as this deal represents a disturbing sign that the US is unwilling to change its policy of total fiscal irresponsibility until forced to by a crisis.
Another pressing issue at the moment is the inflation pressure rocking China and whether the authorities there are willing to go the route of actually hiking interest rates rather than sticking with their current plan of ratcheting up pressure on banks’ capital reserve ratios. They are obviously scared that this risks increasing hot money inflows because of higher interest rates relative to the US while it desperately clings to its currency peg. A Chinese rate hike and any rhetoric that hints at further hikes to come would be risk negative globally. In the press, a Reuters indicates that the PBOC is unlikely to go the rate hike route while the Wall Street Journal suggests significant fears of a hike.
30-year US T-Bond auction
The final auction of this week is on tap for today and it’s an interesting one as the bad Tuesday 3-year auction yielded to a so-so Wednesday 10-year auction. Is this a trend? One of the interesting things going on lately – and this has been extensively covered by ZeroHedge – is that a steepening front end of the curve has been accompanied by a rapid flattening of the 10- to 30-year portion of the curve, frustrating bets that the Fed might be able to hold down yields close to the middle of the curve while not able to control the longest end. Relative strength for 30-year bonds also makes little sense if we are all to believe that the market is increasing its bets that US public sector profligacy will doom the US to high inflation eventually. The markets are always an enigma.
The final auction of this week is on tap for today and it’s an interesting one as the bad Tuesday 3-year auction yielded to a so-so Wednesday 10-year auction. Is this a trend? One of the interesting things going on lately – and this has been extensively covered by ZeroHedge – is that a steepening front end of the curve has been accompanied by a rapid flattening of the 10- to 30-year portion of the curve, frustrating bets that the Fed might be able to hold down yields close to the middle of the curve while not able to control the longest end. Relative strength for 30-year bonds also makes little sense if we are all to believe that the market is increasing its bets that US public sector profligacy will doom the US to high inflation eventually. The markets are always an enigma.
Also, we’re at a massive pivot point at the short end of the curve as the US 2-year rate is at 60 bps, which was the previous low for the cycle in 2008 and 2009 and acts as resistance. Acceleration higher or reversal in yields? This will profoundly affect the JPY crosses and the outlook for risk as well.
Economic Data Highlights
- Australia Nov. Employment Change out at +54.6k vs. +20k expected and 36.9k in Oct.
- Australia Nov. Unemployment Rate fell to 5.2% as expected and vs. 5.4% in Oct.
- Japan Nov. Machine Tool Orders rose 104.2% YoY vs. 71.0% in Oct.
- UK Nov. Halifax House Price fell -0.7% 3M/YoY and -0.1% MoM vs. -0.7%/-0.3% expected, respectively
- Sweden Nov. Headline CPI out at +0.3% MoM and +1.8% YoY vs. +0.2%/+1.7% expected, respectively and vs. +1.5% YoY in Oct.
- Sweden Nov. Core Inflation out at +0.2% MoM and +1.9% YoY vs. 0.0%/+1.8% expected and vs. +1.8% YoY in Oct.
- UK Oct. Visible Trade Balance out at -£8529 vs. -£8100 expected and -£8392 in Sep.
- UK BoE left Rate and Asset Purchase Target unchanged as expected
- Canada Oct. New House Price Index rose +0.1% MoM as expected
- US Weekly Initial Jobless Claims out at 421k vs. 425k expected and 438k last week
- US Weekly Continuing Claims out at 4086k vs. 4237k expected and 4277k last week
Upcoming Economic Calendar Highlights
- US Oct. Wholesale Inventories (1500)
- Japan Nov. Domestic CGPI (2350)
- Japan Nov. Consumer Confidence (0500)
- Japan BoJ Deputy Governor Yamaguchi (0620)
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