Financial Advisor

FX Update: Treading water ahead of NFP?

We’re seeing a bit of consolidation of recent moves today as the market gauges the surprise potential for US payrolls on Friday. Is 300k already priced in? And perhaps our focus should be elsewhere for now?

EuroZone numbers: what crisis?
As PIGS sovereign debt worries continue to dominate the European headlines, the strength in the broader EuroZone numbers continues to show little in the way of a crisis mentality. While the Consumer Confidence survey number has finally dipped a smidgen, it is still at close to the high for the cycle and similar to levels from 2006. Services industry also dipped a bit, perhaps a coinciding indicator of the weak retail sales environment, as demand remains a bit shaky. But the economic and industrial confidence numbers suggest no slowdown at all. It certainly would be easier to argue for a weak Euro if we could get at least a few more signs of data topping out.
Regardless, the market is still sniffing on the trail of the eventual confrontation with the sovereign debt issue, and the Euro remains weak, with EURUSD grazing the 200-day moving average this morning just below 1.3100. Judging from the recent months’ interaction with that moving average. Below that and the chart opens up to the 1.2600-1.2800 zone. There are signs of renewed unease in some of the intra-European CDS and debt spreads and Ambrose Evans-Pritchard over at the Telegraph speculates on whether a new proposal from the European Commission on how to protect taxpayers from bank failures could morph into something far more significant. Worth a read. Meanwhile, the Chinese seem very intent on diplomacy via bond purchases, having mentioned that it is interested in buying Spanish debt. It will be interesting to see whether that debt is ever paid in full.
UK: Ugly services PMI
The pound’s rally against the Euro was given a bit of pause today by an ugly Services PMI number that suggests slightly recessionary conditions in the services sector. This is a bit worrisome, coming as it did before the real austerity measures settle in this year. It’s important to wonder, however, whether the coldest December in 25 years had something to do with the weak survey, just as the Construction survey for the month was also weak. Regardless, the coming months of data are critical for drawing a bead on how the British economy is weather the new austerity package.

US Jobless Claims
The US Weekly Jobless Claims number was in-line and regrettably edged back higher over 400k. It’s crunch time for the trend in claims to continue falling now that we have a new year under way and that we are through the most seasonal of seasons for hiring and firing. The trend still appears very positive, but we are just now nearning claims level associated with a stable job market. At least one large bank is predicting a huge blowout to the upside in US private/nonfarm payrolls for December, even beyond what the ADP showed us. But let’s see how January and February treat us.
Also, the strange irony is that with more jobs, often the participation rate rapidly increases and the unemployment rate goes up for at least a time, so it could be quite a while, even in an improving labor market, before the unemployment rate drops noticeable. Another side note: we still have a hard time digesting the divergence in the ADP and ISM Non-manufacturing employment sub-index, so we’d like to see confirmation with the surveys and non-holiday month strength before boarding the strong job market train.

Looking ahead
The equity market is trying to open strongly yet again today, though the FX market seems to have lost much of its previous behavior. While CAD and EM currencies are strong on the stronger US fundamentals and the positive risk appetite in general, the action elsewhere in the G-10 currencies really seems to show that we are decoupling from the kind of behavior we saw last year , when every uptick and downtick in the USD predictably reverberate across all markets and vice versa. (AUD is weak as commodities have consolidate, data looks a bit shakier there, and the aftermath of the floods are a concern. The Euro is weak on its special situation and the JPY is weak on interest rate rises, to cite a couple of examples). Again, the divergence with past behavior is welcome – let’s hope it lasts.
Everyone is discussing Friday’s US payroll report as the next big event risk. Perhaps it is, though we wonder whether expectations are now so high that an as expected number would be the real shocker, even more than a +400k number. Perhaps even more important for risk more generally will be next week’s first earnings reports. For the last few months, signs are pointing to margin squeezes on the rise in input costs and the current equity environment is priced for perfection. A string of disappointing reports, or tempered outlooks could set the table for an aggravated correction in those currencies still most correlated with risk appetite, and likely a stronger USD as well.
It will be interesting to see the Ivey PMI and the reaction today. Will the service be weak on weather or strong on the general resurgence in energy prices? CAD has been one of the strongest of the G-10 currencies this year and short AUDCAD is an interesting idea from value and macro theme point of view . There may be 1500 pips of downside in that pair in 2011 in the right circumstances.

Economic Data Highlights
  • Australia Dec. AiG Performance of Service Index out at 46.4 vs. 46.2 in Nov.
  • Australia Nov. Building Approvals out at -4.2% MoM and -9.9% YoY vs. -4.0%/-9.8% expected, respectively and vs. +3.5% YoY in Oct.
  • Switzerland Dec. CPI out at 0.0% MoM and +0.5% YoY vs. -0.1%/+0.4% expected, respectively and vs. +0.2% YoY in Nov.
  • UK Dec. Services PMI out at 49.7 vs. 52.8 expected and vs. 53.0 in Nov.
  • EuroZone Consumer Confidence out at -11.0 vs. -10.2 expected and -9.4 in Nov.
  • EuroZone Economic Confidence out at 106.2 vs. 105.8 expected and 105.1 in Nov.
  • EuroZone Industrial Confidence out at 4.0 vs. 2.0 expected and 0.7 in Nov.
  • EuroZone Services Confidence out at 9.8 vs. 10.1 expected and 10.3 in Nov.
  • EuroZone Nov. Retail Sales out at -0.8% MoM and +0.1% YoY vs. +0.2%/+2.1% expected, respectively and vs. +1.2% YoY in Oct.
  • Germany Nov. Factory Orders rose +5.2% MoM and 20.6% YoY vs. +2.1%/+15.9% expected, respectively
Upcoming Economic Calendar Highlights (all times GMT)
  • Canada Dec. Ivey PMI (1500)
  • US Weekly EIA Natural Gas Storage (1530)

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