ECONOMETER

The USD was spurred by stronger US data and a further deterioration in EUR sentiment. The data including an improvement in consumer confidence and in particular a strong (+325k) ADP private sector jobs report, support the case for medium term USD outperformance amid growing evidence of relatively superior US growth.

While having a limited impact on interest rate expectations due to the Fed’s commitment to maintain very accommodative policy and thus also limiting the scope of USD gains, the data nonetheless, highlights the scope for a relative rise in US bond yields relative to bunds over the medium term and in turn a firmer USD versus EUR.

Whether the December ADP data translates into a similarly strong December payrolls outcome today is debatable but consensus forecasts have been likely revised higher. We look for a 190k increase, which ought to provide more evidence of US economic and USD outperformance.

Part of the explanation for USD strength is simply a weaker EUR. Although France’s debt auction yesterday was not particularly negative it did reveal an increase in borrowing costs while yields in peripheral bond markets continue to move higher. As noted, data releases in the Eurozone are providing little support to the currency and today’s November retail sales release will add to the evidence of weakening growth, with a further contraction expected.

Central banks and official investors in general appear to be pulling the rug from under the EUR’s feet, meaning that the usual support for the currency is disappearing fast while German bond yields have moved below US 2-year yields. Nonetheless, the market is heavily short EUR and further downside may not be as rapid. Technically, a break below EUR/USD support around 1.2767 will open the door to a drop to 1.2642.

Following yesterday’s slightly disappointing trade data markets will turn their attention to next week’s November retail sales, building approvals and January consumer confidence data in Australia. AUD has held up relatively well in the first week of the new year despite the ongoing tensions in the Eurozone and related rise in risk aversion.

Fortunately for the AUD its correlation with risk aversion is quite low, suggesting some resilience to higher risk aversion. Nonetheless, the market appears long of the AUD and it may extend yesterday’s pull back as investors take profits ahead of the US jobs report.