All eyes on US payrolls

January 4, 2010 — Mitul Kotecha

Happy New Year.  Markets are likely to struggle for direction ahead of the key US December non-farm payrolls data though the end of the year ended on a softer note for equity markets in the US, whilst Asian stocks were somewhat firmer.  The USD has taken a firmer tone at the start of this week but is likely to face renewed pressure into the new-year.  The fact that USD/Asian FX has failed to build any momentum on the upside also highlights risks to the USD from current levels. 

Ahead of payrolls look for EUR/USD technical support around 1.4177, with strong resistance around 1.4459 whilst USD/JPY will find support at 91.00 and resistance around 94.08.   I favour a firmer bias for the USD at the beginning of the week but this may not last too long and would look to take profits on long USD / short risk currency positions into next week. 

2010 is set to be a year of two halves for currency markets and whilst the USD is to eventually recover, the rally seen at the end of last year is likely to prove unsustainable, especially now that a lot of short USD positions have been covered.   If anything the pull back in various risk currencies provide better levels to take long positions, especially in the AUD and NZD as well as many Asian currencies where renewed appreciation in the months ahead is likely.  I particularly like the IDR and KRW, two of last year’s winners. 

The US jobs report will provide some evidence of a normalisation in economic conditions, with December likely to have marked the best month in two years for payrolls (Bloomberg consensus forecasts a 1k drop in payrolls). Although hiring is unlikely to pick up quickly and wage pressures are set to remain subdued, the data will mark an encouraging shift in job market conditions following the loss of 7.2 million jobs since the US recession began.  The unemployment rate is likely to remain stubbornly high, however.

Ahead of the jobs data markets will be able to garner some clues to the data from the jobs component in today’s release of the December ISM data.  The ISM is likely to remain in expansion territory though is unlikely to register much of a gain from last month’s 53.6 reading.   The eurozone and UK also release their manufacturing PMIs today and although both will remain above the 50 boom/bust mark, neither are set to register much improvement from November’s reading. 

There will also be some attention on central bank thinking this week, with the release of the December 16 meeting FOMC minutes as well as the BoE rate decision to digest.  The minutes will likely acknowledge some signs of improvement in the economy but there will be no indication that the Fed is shifting its “extended period” thinking even if the Fed wants to reassure markets that it has an exit strategy in place.   The BoE meeting will be a non-event for markets, with more interest on the outcome of the February meeting.

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Caution ahead of US payrolls

December 4, 2009 — Mitul Kotecha

The weaker than forecast November US ISM non-manufacturing, a negative UK press report about the problems in Dubai and caution ahead of the US jobs report have dampened risk appetite overnight though there is expected to be little action until the release of the US jobs report today, with some USD short covering likely ahead of the release.  The jobs data could add to disappoint, with data this week including the ADP jobs report, and the employment components of the ISM surveys consistent with a worse than consensus (-125k) reading.  

It was encouraging however, that jobless claims revealed a further decline (457k) to its lowest since November 2008 indicating further improvement in the jobs market, though the data will have little bearing on today’s payrolls data which as noted above will likely disappoint expectations.  A below consensus may fuel some increase in risk aversion and a slightly firmer USD though markets are most likely to settle into ranges in the near term. 

The JPY may make up some lost ground against the background of weaker equity performance.  Amidst the confusing messages on the JPY over recent weeks officials appear to be giving stronger hints at intervention, leaving the currency on the back foot over recent days.  The drop in the JPY may prove temporary however, if official rhetoric is not followed up by action; USD/JPY is likely to struggle to break through resistance around 88.60.  

Following the BoJ’s disappointing JPY P10 trillion operation announced this week attention turns to the announcement of new government stimulus measures which were reportedly expected today.  This may also prove disappointing however, as there appears to be disagreement between coalition partners on the size and composition of stimulus.  Finance Minister Hatoyama was expected to announce additional spending of up to JPY 4 trillion.  

There was no surprise that the ECB left the refi rate unchanged at 1% yesterday but some surprise in the steps to withdraw provision.  The ECB announced that the interest rate on the December 12-month tender will be indexed to the refi rate and that the full allotment at most of the ECB’s refinancing operations is extended until 13 April 2010 only. As much as ECB President Trichet tried to play down the perception that the steps were a signal of a tighter policy markets are unlikely to interpret it this way. 

Despite the shift in the ECB’s stance EUR/USD pared gains after reaching a high around 1.5141 but failed to test resistance at 1.5150 which is likely to provide strong resistance in the days ahead, reflecting the fact that markets had priced in a hawkish shift by the ECB already.   Going forward, if the market perceives the ECB as prematurely shifting towards a more hawkish stance against the EUR could suffer rather than find any support from such actions

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Economic reality check supports dollar

October 2, 2009 — Mitul Kotecha

The US dollar appears to be making a tentative recovery of sorts at least when taking a look at the performance of the US dollar index.  Much of this can be attributable to a softer tone to equities. The S&P 500 registered its biggest back to back quarterly rally since 1975 over Q3 and either through profit taking or renewed economic doubts, stocks may be in for shakier ground into Q4. 

This increase in equity pressure/risk aversion is being triggered by weaker data. Since the Fed FOMC on 24th September the run of US data has generally disappointed expectations; in addition to the ISM survey, existing and new home sales, durable goods orders, consumer confidence and ADP jobs data all failed to match forecasts.   This list was joined by the September jobs data which revealed a bigger than expected 263k drop in payrolls.  Consequently doubts about the pace of recovery have intensified as markets face up to a reality check.

The dollar’s firmer tone is not just being helped by weaker stocks but also by plenty of official speakers discussing currency moves. Although this is potentially a dangerous game considering the recent turnaround in Japanese official comments on the Japanese yen the net effect is to support the dollar.  In particular, Treasury Secretary Geithner stressed the importance of a strong dollar, whilst European officials including Trichet, Almunia and Junker appear to have become more concerned with the strength of the euro. 

In the current environment such comments will contribute to putting further pressure on the euro which in any case has lagged the strengthening in other currencies against the dollar over recent months.   Although ECB President Trichet highlighted “excess volatility” in his comments about currencies overnight implied FX volatility is actually relatively low having dropped significantly over recent months.  The real reason for European official FX concerns is quite simply the fact that the eurozone remains highly export dependent and that recovery will be slower the stronger the euro becomes.  

It’s not just G10 officials that are becoming concerned about currency strength against the dollar as Asian central banks have not only been jawboning but also intervening to prevent their currencies from strengthening against the dollar.   A firmer dollar tone is likely to put Asian currencies on the back foot helping to alleviate some of the upward pressure over the short term but the overall direction for Asian FX is still upwards.

Posted in Asia, central banks, Currencies, Economics, Economy, equity markets, Europe, Japan, US. Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , . 1 Comment »
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