Is the strong U.S. employment report enough for a more sustainable boost for the greenback, or will the commodities and risk rally continue to thwart the currency’s attempts at making a comeback on strong economic data and the recent spate of hawkish noises from the Federal Reserve?
Kocherlakota boosts Fed expectations again
The Minneapolis Federal Reserve's Kocherlakota, considered on the hawkish end of the FOMC spectrum when he became a voting member this year, though at times he has been surprisingly dovish sounding earlier this year, has now joined some of his Fed colleagues in making hawkish noises about the end of QE2 and the need for the Fed to raise rates soon. Although he did not go as far as recent Bullard remarks on the need to end QE2 ahead of time (he believes the Fed will complete the programme), he did suggest that a normalisation of interest rate policy is a desire – perhaps toward 0.75% for the Fed funds rate by year end. A bit curious that his remarks saw a stronger reaction in the markets than did Bullard’s, but the forward expectations for the Fed perked up about 7-8 ticks on his rhetoric late yesterday.
What is the market thinking?
Ahead of the U.S. payrolls, we saw a very interesting pattern in the major currencies: higher interest rates are making their presence felt very strongly in the currencies with the lowest forward yield expectations like the JPY and CHF, and GBP is also seeing a good deal of pressure as the Bank of England is seen as very slow to reach for the interest rate policy lever. The U.S. has rallied sharply against the JPY and the CHF over the last couple of days, and outperformed the pound and the Euro only for brief spurts when we get particularly hawkish noises emanating from the Fed. Elsewhere, we have very strong commodity currencies as commodities and risk remain in make-no-bones-about-it rally mode and the USD hasn’t made any progress.
The Minneapolis Federal Reserve's Kocherlakota, considered on the hawkish end of the FOMC spectrum when he became a voting member this year, though at times he has been surprisingly dovish sounding earlier this year, has now joined some of his Fed colleagues in making hawkish noises about the end of QE2 and the need for the Fed to raise rates soon. Although he did not go as far as recent Bullard remarks on the need to end QE2 ahead of time (he believes the Fed will complete the programme), he did suggest that a normalisation of interest rate policy is a desire – perhaps toward 0.75% for the Fed funds rate by year end. A bit curious that his remarks saw a stronger reaction in the markets than did Bullard’s, but the forward expectations for the Fed perked up about 7-8 ticks on his rhetoric late yesterday.
What is the market thinking?
Ahead of the U.S. payrolls, we saw a very interesting pattern in the major currencies: higher interest rates are making their presence felt very strongly in the currencies with the lowest forward yield expectations like the JPY and CHF, and GBP is also seeing a good deal of pressure as the Bank of England is seen as very slow to reach for the interest rate policy lever. The U.S. has rallied sharply against the JPY and the CHF over the last couple of days, and outperformed the pound and the Euro only for brief spurts when we get particularly hawkish noises emanating from the Fed. Elsewhere, we have very strong commodity currencies as commodities and risk remain in make-no-bones-about-it rally mode and the USD hasn’t made any progress.
This suggests that the market thinks the central bankers are very much behind on policy normalisation and that the anticipated moves in the pipeline will not prevent the risk party from continuing. This underlying complacency/bullishness is stronger than we would have expected if you had asked us a month or more ago how the market would respond if it became clear that the Fed would end QE2 – possibly even ahead of time – and would start making noises about hiking rates before year-end.
The question at present is how compatible a renewed spike in food and energy prices is with strong emerging market equity indices and other major risk categories. Eventually, with both commodity and equity prices spiking, you get a train wreck. Another curiosity is that the market is extremely responsive from a rate spread perspective in the currencies with the lowest yield expectations while not giving the USD any respect vs. the commodity currencies from the same perspective (according to which the USD should be firmer) after the recent parade of Federl Reserve noises on normalisation, preferring instead to trade the commodity angle.
U.S. employment data
The headline U.S. employment data is slightly better than expected, with nonfarm payrolls tacking on 216k for the month, an improvement from the previous month’s 194k. The unemployment rate dropped a tenth of a percent to 8.8% and with an unchanged labor force participation rate, this drop was “real”. An interesting Bloomberg article discusses the phenomenon that is the U.S. employment rate and why it rose so sharply in the first place, why it is falling so fast now.
The headline U.S. employment data is slightly better than expected, with nonfarm payrolls tacking on 216k for the month, an improvement from the previous month’s 194k. The unemployment rate dropped a tenth of a percent to 8.8% and with an unchanged labor force participation rate, this drop was “real”. An interesting Bloomberg article discusses the phenomenon that is the U.S. employment rate and why it rose so sharply in the first place, why it is falling so fast now.
If we are to discuss a negative from this report, it is mostly certainly in the earnings department, as earnings failed to rise at all for the month of March and are only up a scant 1.7% year-on-year. Effectively, with spiking food and commodity prices, this means workers’ wages are buying less and less and one wonders what this must mean for end demand in coming months, not to mention corporate profit margins for this quarter and next. Crude prices saw the highest settlement price for the cycle yesterday, both for the US WTI and UK Brent grades. This certainly has CAD and NOK in rally mode.
Looking ahead
The immediate aftermath of the U.S. employment report is seeing a justified USD rally almost across the board, but most concentrated versus the lower yielding currencies, as we discuss above. But looking at intrest rate spreads, even with the recent Federl Reserve rhetoric there is little support for a dramatic further move just yet, and one suspects that the USD would need for calmer commodity and risk markets in its corner if it is to launch a more sustainable and broader rally. Still, the first 1.4150/30 support has been taken out in EURUSD, so let’s see if 1.4030/1.4000 comes under fire next.
The immediate aftermath of the U.S. employment report is seeing a justified USD rally almost across the board, but most concentrated versus the lower yielding currencies, as we discuss above. But looking at intrest rate spreads, even with the recent Federl Reserve rhetoric there is little support for a dramatic further move just yet, and one suspects that the USD would need for calmer commodity and risk markets in its corner if it is to launch a more sustainable and broader rally. Still, the first 1.4150/30 support has been taken out in EURUSD, so let’s see if 1.4030/1.4000 comes under fire next.
Remember that the U.S. ISM Manufacturing report is on the way shortly, and it is likely to be quite strong judging from the mostly very strong regional surveys.
Look out for the G20 this weekend, which looks to concentrate on the EuroZone sovereign debt situation (we complained about the lack of appreciation for the severity of what the EuroZone faces in yesterday’s article, the compelling math suggesting that Ireland must perform a head-and-torso “haircut” or simply bid the EuroZone farewell – but perhaps doubtful whether). Meanwhile, the other major focus at the G20 will be Japan's post-tsunami disaster and what the international community can do to help from a financial angle. Read Bloomberg’s excellent commentary on what the dilemma the BoJ faces in the aftermath of this catastrophe. Next week we have the first ECB hike on Thursday as well as a potential shut-down of the U.S. government on Friday over the budget ceiling issue.
Be careful out there.
Economic Data Highlights
New Zealand Q4 Manufacturing Activity out at +3.1% vs. +1.4% in Q3
Australia Mar. AiG Performance of Manufacturing out at 47.9 vs. 51.1 in Feb.
Japan Q1 Tankan Large Manufacturers Index out at 6 vs. 5 expected and 5 in Q4
Japan Q1 Tankan Non-manufacturing Index out at 3 vs. 2 expected and 1 in Q4
China Mar. PMI Manufacturing Index out at 53.4 vs. 54.0 expected and 52.2 in Feb.
China Mar. HSBC Manufacturing PMI out at 51.8 vs. 52.4 expected and 51.7 in Feb.
Sweden Mar. Swedbank PMI out at 58.6 vs. 60.3 expected and 60.9 in Feb.
Norway Mar. PMI out at 57.7 vs. 58.5 expected and 58.6 in Feb.
Norway Mar. Unemployment Rate out at 2.9% as expected and 3.0% in Feb.
Switzerland Feb. Retail Sales out at +1.5% YoY vs. -2.6% in Jan.
Switzerland Mar. SVME PMI out at 59.3 vs. 62.5 expected and 63.5 in Feb.
UK Mar. PMI Manufacturing out at 57.1 vs. 60.9 expected and 60.9 in Feb.
EuroZone Feb. Unemployment Rate out at 9.9% as expected and vs. 10.0% in Jan.
US Mar. Change in Nonfarm Payrolls out at +216k vs. 190k expected and 194k in Feb.
US Mar. Change in Private Payrolls out at +230k vs. 206k expected and +240k in Feb.
US Mar. Unemployment Rate out at 8.8% vs. 8.9% expected and vs. 8.9% in Feb.
US Mar. Average Hourly Earnings out at 0.0% MoM and +1.7% YoY vs. +0.2%/+1.9% expected, respectively and vs. +1.7% YoY in Feb.
US Mar. Average Weekly Hours out at 34.3 as expected and vs. upwardly revised 34.3 (from 34.2) in Feb.
Upcoming Economic Calendar Highlights (all times GMT)
US Fed’s Dudley to Speak (1400)
US Feb. Construction Spending (1400)
US Mar. ISM Manufacturing (1400)
US Mar. Total/Domestic Vehicle Sales (2100)
China Mar. China Non-manufacturing PMI (Sun 0100)
Australia Mar. AiG Performance of Service Index (Sun 2330)
Economic Data Highlights
New Zealand Q4 Manufacturing Activity out at +3.1% vs. +1.4% in Q3
Australia Mar. AiG Performance of Manufacturing out at 47.9 vs. 51.1 in Feb.
Japan Q1 Tankan Large Manufacturers Index out at 6 vs. 5 expected and 5 in Q4
Japan Q1 Tankan Non-manufacturing Index out at 3 vs. 2 expected and 1 in Q4
China Mar. PMI Manufacturing Index out at 53.4 vs. 54.0 expected and 52.2 in Feb.
China Mar. HSBC Manufacturing PMI out at 51.8 vs. 52.4 expected and 51.7 in Feb.
Sweden Mar. Swedbank PMI out at 58.6 vs. 60.3 expected and 60.9 in Feb.
Norway Mar. PMI out at 57.7 vs. 58.5 expected and 58.6 in Feb.
Norway Mar. Unemployment Rate out at 2.9% as expected and 3.0% in Feb.
Switzerland Feb. Retail Sales out at +1.5% YoY vs. -2.6% in Jan.
Switzerland Mar. SVME PMI out at 59.3 vs. 62.5 expected and 63.5 in Feb.
UK Mar. PMI Manufacturing out at 57.1 vs. 60.9 expected and 60.9 in Feb.
EuroZone Feb. Unemployment Rate out at 9.9% as expected and vs. 10.0% in Jan.
US Mar. Change in Nonfarm Payrolls out at +216k vs. 190k expected and 194k in Feb.
US Mar. Change in Private Payrolls out at +230k vs. 206k expected and +240k in Feb.
US Mar. Unemployment Rate out at 8.8% vs. 8.9% expected and vs. 8.9% in Feb.
US Mar. Average Hourly Earnings out at 0.0% MoM and +1.7% YoY vs. +0.2%/+1.9% expected, respectively and vs. +1.7% YoY in Feb.
US Mar. Average Weekly Hours out at 34.3 as expected and vs. upwardly revised 34.3 (from 34.2) in Feb.
Upcoming Economic Calendar Highlights (all times GMT)
US Fed’s Dudley to Speak (1400)
US Feb. Construction Spending (1400)
US Mar. ISM Manufacturing (1400)
US Mar. Total/Domestic Vehicle Sales (2100)
China Mar. China Non-manufacturing PMI (Sun 0100)
Australia Mar. AiG Performance of Service Index (Sun 2330)
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