Given the markets lack of focus on fundamentals lately, the loonie by all accounts, for a growth sensitive currency is holding its own outright, but for how long? The Loonie has been riding on the coattails of a strong NFP report (+243k and +8.3%) and ignoring its own softer domestic job output print (+2.3k and +7.6%) that supports BoC Carney dovish tone and economic concerns of late.
The market is assuming that the Canadian economy should increasingly benefit as its largest trading partner down south recovers from the recession. Investors are beginning to believe that any positive US data should keep the pressure on for a lower USD/CAD (0.9971). All this from one day out when the market was wondering if the worlds largest economy was slipping back into recession. One stellar NFP print does not make a trend, but it is a start!
Currently, the dollars price continues to lift off last weeks low print of 0.9928. According to the technicals, the daily charts indicate that the loonie is overbought, but selling outright dollar strength seems to remain the order of the day whilst below the four-week trend line (1.0015), risk is lower to 0.9780.
Depending on what Greek rumor dominates the hour, soft Canadian PMI data this morning could have the currency Bulls scatter a period. Its anticipated that the Ivey PMI could come in a tad softer, maybe decline from 63.5 to even below expectations of 58 in January. A softer reading should be able to kick some of this enthusiastic stuffing out of the energetic Bulls on expectations of a dovish turn from the BoC. This will temporarily lead the CAD to under perform the rest of the risk complex.
Analysts’ employment expectations were blown out of the water on Friday. NFP produced a stellar report, creating +243k new jobs, pushing the unemployment rate down two ticks to +8.3%. Risk has been quickly applied and added to in the markets. The loonie is a shining example of a growth currency outperforming, especially on the back of its own disappointing employment report. However, beware of the extremely bearish risk factors lurking in the background i.e Euro debt crisis, slowing global growth and Iran nuclear concerns, which remain largely ignored, before wagering it all on risk. It’s a good start to 2012 for the Obama administration, but not a trend just yet. The headline print has managed to produce some blood on the “street”, they had predicted a more bearish print.
Below are some other highlights of the week:
Americas
USD: This week we saw incomes pick up during December, +0.5%, however, individuals chose to increase savings instead of spending, showing a caution that will likely keep the US economy in slow growth mode throughout 2012. November spending was unrevised at +0.1%.
USD: Unexpected poor Case-Schiller Home Prices and an unexpected Chicago PMI managed to trigger some macro-money profit taking on the last day of the month. Case-Schilller November 20-city HPI fell -1.3%, m/m. The housing market remains sluggish despite lower prices and interest rates, an abundance of foreclosures and tighter mortgage requirements.
USD: Chicago PMI was 60.2 compared with a forecast of 62.2. The forward looking component, the new order index, dropped in January to 63.6 from 67.1.
USD: US January consumer confidence retreats to 61.1 from 64.8, giving back some of the huge gains witnessed over the past two-months. The fallback was concentrated in consumers views of the current economy. The present situation index (current economic indicators) dropped to 38.4 from a revised 46.5-“consumers are more upbeat about employment but less optimistic about business conditions and their incomes.”
CAD: The Canadian economy shrank for the first time in six-months, dragged down mostly by a decline in energy output (oil and gas fell -2.5%), down -0.1% to +CAD$1.27t in November. The BoC released forecasts from two-weeks ago was for GDP growth to slow to +2% in October through December from +3.5% in Q3.
USD: ADP reported that Private Sector Jobs with small businesses lead the hiring +95k. However, the December print was revised lower to +292k from +325k. Its a “slow and steady pace” that could bring down the unemployment rate, but not rapid enough to return payrolls to their pre-recession peaks anytime soon.
USD: January ISM rises near to expectations of 54.1, proof that growth picked up last month. Digging deeper, prices gained ground after contracting in December, and hiring grew at a slightly slower pace. Factories continue to be a consistent contributor to overall growth.
USD: The number of US workers filing new claims for unemployment benefits declined last week (-12k to +367k), continuing the mostly improving trend seen in nine-months. The four-week moving average decreased by -2k to +375,750, remaining below that psychological +400k benchmark that’s required to add jobs to the economy.
USD: In his House Budget Committee testimony this week, Bernanke has not changed his tune, again stating that the economy has shown signs of improvement while remaining vulnerable to shocks, and he called on lawmakers to reduce the long-term US budget deficit.
USD: Dallas Fed Fisher (nonvoter) reiterated his opposition to further QE. He said that QE3 is not needed and that it would complicate the eventual tightening policies.
CAD: Employers hired far fewer workers than expected in Jan (+2.6k vs. +23k) and the jobless rate rose unexpectedly to +7.6% from +7.5%. The data reflects an economy that’s slowing and is consistent with the BoC keeping rates unchanged. Despite creating +129k jobs last year-growth was in the first six-months. (Full-time jobs declined by -3.6k, part-time rose +5.9k, private and public sector increased by +39k while self-employed fell-37k).
USD:NFP produced a stellar report, sideswiping most analysts expectations. Payrolls increased by +243k, m/m, allowing the unemployment rate to ease two-ticks to +8.3%. The breakdown saw manufacturing gain +50k, services +162k and the Government eliminate-14k positions. The hourly income increased +0.2% while the number of hours worked remained unchanged at +34.5.
U.S. Dollar: Index Threatens Downward Trending Channel, Labor Force Continues To Shrink
Euro: Carves Out Lower Top, Greece Seeks Another EUR 15B
British Pound: Upward Trend Gives Out, BoE To Conduct More QE
U.S. Dollar: Index Threatens Downward Trending Channel, Labor Force Continues To Shrink
The greenback extended the advance from the previous day, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) advancing to a high of 9,751, and the short-term reversal should gather pace in the coming days as the index threatens the downward trending channel carried over from the previous month. Indeed, employment in the world’s largest economy increased another 243K in January, and the rise in hiring may lead the Fed to soften its dovish tone for monetary policy as the recovery gradually gathers pace.
However, we saw the jobless rate fall back to 8.3% from 8.5% as discouraged workers continued to leave the labor force, and Fed Chairman Ben Bernanke may keep the door open to expand the balance sheet further in an effort to encourage a stronger recovery. In turn, we expect the FOMC to maintain a wait-and-see approach throughout the first-half of the year, but there’s little in the way of seeing another round of quantitative easing as the risk of a double-dip recession subsides. As the USDOLLAR appears to be finding near-term support around the 38.2% Fibonacci retracement at 9,710, this could be a key reversal for the greenback, and the bullish momentum underlining the dollar looks poised to gather pace in the week ahead as the relative strength index bounces back from a low of 30.
Euro: Maintains Narrow Range, All Eyes On ECB Rate Decision
The Euro pared the advance to 1.3205 to maintain the range from earlier this week, and the single currency is likely to face additional headwinds in the following week as the fundamental outlook turns increasingly bleak. Although the European Central Bank is widely expected to keep the benchmark interest rate at 1.00%, we are likely to see President Mario Draghi maintain a dovish tone at the press conference following the rate decision, and the central bank head may take additional steps beyond the three-year loan facility scheduled for the end of the month as the heightening risk for contagion continues to pose a threat to the world financial system. In turn, we are looking for a close below the 10-Day SMA (1.3115) to provide conviction for a short EUR/USD trade, and the exchange rate looks poised to fall back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2630-50 as the pair appears to be carving a lower top in February.
British Pound: Upward Trend Gives Out, BoE To Conduct More QE
The British Pound broke out of the upward trending channel from the previous month, with the GBP/USD slipping to a low of 1.5749, and we expect the sterling to face additional headwinds in the following week as market participants see the Bank of England expanding its asset purchase program by another GBP 50B next week. As the GBP/USD fails to make another run at the 200-Day SMA (1.5956), with the RSI falling back from a high of 66, the technical outlook point to a short-term reversal in the exchange rate, but we may see the pound-dollar hold steady ahead of the BoE rate decision as the pair continues to find support around the 38.2% Fib from the 2009 low to high around 1.5730-50.
— Written by David Song, Currency Analyst
To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong
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The EUR 1.32 handle was to be in the distant past. One Euro summit later, in tandem with month-end requirements, and we have a trading environment wishing to finally throw some volume about and a ‘lost’ currency finding some of its mojo again. The dollar seems to have suffered the opposite fate over the last trading session, under-performing against its peers in response to the relatively constructive outcome from yesterday’s flash EU summit in Brussels (the sixteenth in two years). It seems to be in the post summit, with reluctance, that the bears have been covering some of their longer term short EUR positions. The explanation that the Greek situation may be getting better is an explanation to fit the price action or is it the US, IMF and the Euro-zone working to combine the ESM and EFSF into a superfund with +EUR1.5t the reason?
Investors have tentatively welcomed the EU leaders agreement on a higher fiscal pact to be signed off next month, and a bailout mechanism that will come into effect in July. However, a black cloud still exists over proceedings. Portugal’s 10-year government yield (+16.29%) remains elevated and there is still no agreement between Greece and the private sector. The market is again concerned that the Portuguese will require another Greek style bailout if their government is unable to access the capital markets for ‘route one’ funding requirement. The country’s yields have ballooned since credit rating agencies lowered their ratings to below sub-investment grade earlier this month. Just like the other members of the peripheries, investors remain skeptical that the PSI in the Euro-zone sovereignty will only be applied to Greece.
However, in this moment, the summit is being viewed as a success relative to modest expectations. Belief like this has eliminated some of the event risk for the Euro-system. The bears will argue that the various asset classes have priced in a successful outcome already given the rallies across the board over the past week. With the Greek PSI agreement remaining elusive, this again can create enough market anxiety, reminding us that yesterday’s EUR level lows are only but a few trades away. The uncertainty over the extent of actual participation in the debt swap has the market again wanting to fade rallies in the EUR, especially as we approach the employment reports. Fear that other Euro financing stress issues, coupled with the regions deteriorating growth dynamics, may again urge monetary authorities to apply further easing.
Besides Greece, the market is beginning to focus on US employment data later this week and on the dynamics of BoJ and SNB own unique currency situations. Both authorities are on the verge of intervention. The Fed’s decision to extend its contingent commitment to low rates into late 2014 reinforces the markets bullish view on the yen. The EUR/CHF itself is only a touch above the official floor as investors risk aversion appetite comes into question with so much Euro sovereign uncertainty. In the big picture, 1.3250 remains the key resistance zone, but sustaining a break into the 1.32 must first be cemented.
The 1.32 EUR handle is in danger of becoming a distant past. Today’s Euro summit could fail to appease investors concerns about the fiscal outlook of Greece. If that is the case, then the single currency price action is on the verge of repeating itself; a pattern of pre-summit gains and post-summit losses.
The Greek economy is only “one” of the Euro peripheries on the brink of deteriorating further into the abyss near term. The country’s own officials are pushing back on Germany’s proposal for Greece to cede control over its budget in return for aid. Without aid from the IMF and EU, a Greek private sector involvement deal is in danger of collapsing this week. Everyday the market is warned of this pending deal, a deal that was supposed to be concluded weeks ago, a deal that still has some Euro-euphoria premium priced in. Further uncertainty will convince the optimists that a near term EUR top may have been already been established last Friday.
The Fitch credit downgrading last week does not make it any easier for some of the struggling Euro nations to come to the table to raise cash. Auctions this week will be the biggest test of sentiment so far this year. This morning, the Italian auction cleared well, with Italy selling +7.5b of bonds out of a total of +8b. However, the ECB were seen post-results; not necessarily good. Italy, Belgium and Spain sell no less than +EUR22b’s worth of debt amongst a credit rating poisoned atmosphere. The pending issues will be somewhat of a litmus test at these much lower-than-before yield levels. The Italian benchmark 10’s (+5.90%) had only recently traded above the markets +7% default barometer.
The Euro-zone economic sentiment rising to 93.4 from 92.8 has only been capable of offering the single currency slight short-term support. The currency seems to want to check out further, the stop-loss orders touted below the bids into the figure at 1.31 option expiry fame. The economic sentiment indicator along with other Euro surveys may persuade Draghi and company to leave monetary policy unchanged at next months meeting as they look to see if the Euro-zone economic activity is stabilizing. Is the EUR top in for now?
Plans for the Greek Private Sector Involvement remain a source of considerable uncertainty for peripheral markets, and the inconclusive result of negotiations over the past few days will leave the EUR and risk complex vulnerable to a large correction. However, the EU economic and monetary commissioner has indicated that authorities are very close to concluding their talks, either later today or over the weekend. Will the market add to the risk trades that have been applied since the Fed, earlier this week, increased its “free money” term length by 18-months? So far it’s been too tempting for the market to refuse and risk is being added accordingly.
The mixed signals from the Euro-zone debt market means investors need to tread with caution. Thus far, ECB liquidity has boosted demand for Spanish and Italian debt. The same cannot be said for Portugal. Peripheral bond yields have resumed their collapse this week, with Italian 10-year yields down -18bp to +5.84%, a long way from that +7% imploding benchmark. Portugal remains the outlier, with yields still under upward pressure. Perhaps if China invested in Europe we would not care so much?
Below are some other highlights of the week:
EUROPE
EUR: Greek talks were expected to show something of substance last weekend. Not unexpected, this week began with Greece failing to yield agreement on the public sector involvement. Negotiators have been squabbling over the coupon that restructured bonds will carry.
EUR: The single currency opened lower in the Chinese New Year and despite all the negatives, soared through last weeks highs allowing the techies to start talking about outside weekly reversals as the currency remains elevated.
EUR: Analysts expect that even a successful conclusion to discussions would still leave the actual degree of private sector uptake unclear. EUR bears are still looking for that top, as default risks will not fully ‘abate’.
FRF: French January business confidence surprised weak, falling to 91 from 94. The market had been expecting a small uptick, especially after the German IFO and EU PMI prints.
EU: Portuguese debt worries have resurfaced to add to Greek default concerns.
S&P’s Chambers: Greece ‘In all likelihood’ is down to a selected default. However, this default is not expected to destroy the credibility of EMU.
EU: Euro-zone flash PMI’s came in firmer than expected with the composite back above 50 after four-months in contraction territory. This suggests that the region ‘should avoid a collapse in output’ and another quarter in the GDP ‘red’. Manufacturing PMI rose to 48.7 from 46.9 and services PMI rose to 50.5 from 49.0.
GER: Their numbers were strong with manufacturing PMI at 50.9 and services PMI at 54.5. Big picture, data should help the Scandis and CE3 currencies.
ESP: Spain saw strong demand at its bill auction. Spanish Treasury sold +EUR2.51b of 3-and 6-month bills. The bid-to-cover was high in both issues.
EU: With Greek PSI negotiations inconclusive, the IMF is pushing for the ECB’s to take a haircut along with PSI as a means of distributing losses back to governments. However, the ECB and German coalition remains opposed to taking a loss on ECB holdings. Expect the heavy peripheral issuance schedule to remain a key factor in keeping the bulls on their toes.
GER: German ifo surprised higher with the expectations component at 100.9, above the consensus for 99 and up from 98.6 previously (the third consecutive rise) and suggests a GDP growth rate of +0.5% q/q.
GBP: UK GDP contracted more than expected in Q4, down -0.2%, q/q, vs. -0.1%. The weakness was driven mainly by soft industrial production in October and November and poor services at the start of the quarter.
GBP: BoE minuets deferred the decision on more QE until next month, as expected. The assessment on the economy was somewhat less pessimistic as members judged the most serious downside risks have abated. However, others understood that the “risks of undershooting the target meant an expansion of the QE program is likely to be required”.
FOMC: FX risk has rallied following the Fed’s shift to a more dovish policy stance. With US yields holding on to post meeting losses and pricing of tightening being pushed further out in the future has increased the appeal of EM FX.
HUF: Hungary sold HUF +48b worth of bonds (+13b more than expected). This would suggest that market perception of HUF risk has improved. PM Orban has softened his stance on recent legislation and indicated that he is willing to adjust their policies in order to win financial backing from the EU and IMF.
SEK: Manufacturing confidence surprised soft, falling to -14 vs. -11. Analysts believe that weak growth and the recent sharp moderation in core-inflation allows for a rate cut by the Riksbank at the next meeting.
EU: Peripheral bond yields have resumed their collapse, with Italian 10-year yields down -18bp to +5.84% (Friday Morning). However, Portugal remains the outlier with yields still under upward pressure.
EU: On Friday, Rehn indicated that PSI talks are very close to conclusion, either today or over the weekend.
EU: Euro area M3 growth has slowed significantly to +1.6%, y/y, from +2.0%.
CHF: Swiss KoF leading indicator dropped to -0.17 this month from +0.01 in December (ninth consecutive monthly decline and the first negative reading in two years). However, the release is at odds with the recent upward surprise in the PMI back above 50.
Fitch: Downgrades Belgium, Italy and Spain.
PLN: Poland recorded above consensus 2011 GDP growth of +4.3%, y/y.
Should continue to attract foreign capital and support the PLN.
“Key” surprises have ended up being the theme of this week. The Fed has extended the term of free money by 18-months and the door is now ajar for further QE. It’s the “when” that many appear to disagree with. It seems unlikely to be applied until after operation twist ends in June. QE2 and the ‘twist’ arrived after extensive debates and many months of weak data. In the medium term, both equities and commodities should continue to benefit from the idea that the Fed has better than even odds of performing additional QE.
US GDP, despite growing at a solid +2.8% in Q4, provided its surprise in the details. The mix of growth suggests weakness this quarter and beyond. The bulk of last quarter’s growth came from the inventory sector (+2% of the top-line). Real GDP ex-inventories were a poor +0.8%, the weakest pace in a year.
Below are some other highlights of the week:
AMERICAS
CAD: Retail Sales rose a tad more than expected in November (+0.3% vs. +0.2%). However, it was the smallest of four consecutive monthly gains, on increased sales of gas and clothing. Sales rose to +$38.7b slowing from a revised +0.9% increase in October. Sales volume at +0.5% was also the fourth straight increase.
USD: Obama’s campaign begins. In the State of the Union address he called for the creation of a trade enforcement division to investigate unfair trade practices, an end to tax deductions related to US company closures of facilities in the US for relocation abroad. He also announced plans to provide financing for US firms competing with overseas firms receiving state financing.
USD: December Pending Home Sales (-3.5% to 96.6) fell from its 19-month high print the prior month. The results were +5.6% above the December 2010 point.
USD: Weekly crude inventory report increased by +3.6m barrels last week to +334.8m barrels.
FOMC: The Fed surprised markets mid-week by extending its contingent commitment to low policy rates through 2014 (an extension of 18-months). In their transparency approach, the FOMC central projections showed only 6 of 17 committee members anticipate no easing before 2015.
USD: December durable goods orders firm with a +3% increase and a +2.1% ex-transport print. This supports recent manufacturing survey’s that the sector is regaining some momentum.
USD: As expected, seasonally adjusted initial unemployment benefit claims contracted upwards last week to +377k, up +21k w/w. The less volatile four-week average stands at +377.5k. Continuing claims now at +3.55m is more consistent with a +8.6% unemployment rate.
USD: December new home sales unexpectedly fell -2.2% to +307k, well below consensus estimates of +320k. It’s disappointing data on the back of other recent housing indicators having been positive. The data suggests that the market cannot be confident of a strong and sustained boost to GDP despite lower mortgage rates.
USD: First reading of the US Q4 GDP did not live up to hype. Economists expected +3% and they got +2.8%, however, still a notable improvement from the +1.8% in Q3 print.
USD: The belief that more jobs are to be had pushed the UoM consumer sentiment higher to 75 from 74. Sentiment has been expanding for five-months; stronger payrolls lead to stronger sentiment.
USD: UoM inflation expectations edged higher to +3.3% at the end of January from +2.7% earlier in the month.
On Wednesday, the Office for National Statistics (ONS) revealed that the UK economy contracted by 0.2 percent for the final quarter of 2011. Economists had predicted a slight increase of 0.1 percent for the last three months of the year.
Despite the feeble ending to the year, the latest ONS data shows overall growth for 2011 was a mediocre, but still positive, 0.9 percent. Still, this level of expansion is well below the Bank of England’s 2 percent growth target and there is a real concern that the economy will continue to shrink during the first half of 2012.
This could hardly come at a worse time for the British government. Like many of its G8 counterparts, the UK is faced with the dilemma of promoting growth, while at the same time, keeping a lid on spending. In fact, government spending was a central theme in the 2010 election and resulted in a coalition government led by Conservative Prime Minister David Cameron together with the Liberal Democrats.
The new government came to power on a promise to address the country’s out-of-control spending which few would argue was not already well beyond a crisis point. And that is actually saying something as Great Britain has a long history of deficits.
In fairness, some of this debt was accumulated as part of the effort to fight two major wars, but even in peace time, Britain typically spends more than it earns.
During the 1970s and 1980s, high levels of inflation forced the government to rely on borrowing to maintain spending programs. In the span of those two decades alone, total debt rose from £33.1 billion ($51.6 billion) in 1970 to £197.4 billion ($308.0 billion) by 1988.
Since then, Britain has actually increased its reliance on deficit financing. By 1997 total public debt was £352 billion ($549 billion), but by the end of 2009, debt had once again more than doubled and has now broken through the £1 trillion ($1.6 trillion) barrier.
Britain’s 2011 deficit is expected to be in the range of £150 billion ($234 billion), making it only marginally better than the previous year’s deficit of £170 billion ($234 billion) despite a full year of government spending cuts. The country’s debt to GDP ratio is still nearly 80 percent and with weaker growth expected in the coming year, this statistic could worsen.
Both the Bank of England and the International Monetary Fund (IMF) recently downgraded earlier growth projections for 2012. The IMF slashed its prediction by a full percentage point and now expects the British economy to expand by only 0.6 percent this year.
Eurozone Crisis and Austerity Measures
With its close proximity and trade ties with Europe, Britain is heavily exposed to the uncertainty arising from the Eurozone debt crisis. In late November, the Organization for Economic Development and Cooperation (OECD) released a stark statement warning that the UK will almost certainly face another recession in the first half of 2012 because of the turmoil in the Eurozone. Britain has already recorded one quarter of negative growth – should the first quarter of 2012 also be negative, the OECD’s prophecy will come true.
While there is little the government can do with respect to solving the Eurozone issue, it will be interesting to see if the government moderates its drive to eliminate the deficit in deference to the slowing economy. Reducing the deficit is necessary, but it is impossible to dramatically slash spending without impacting growth. With growth already on the decline, it may be advisable for the government to moderate its spending reduction plans at least until the economy gathers strength.
As part of the Davos World Economic Forum, UK Prime minister, David Cameron is urging his EU counterparts to follow Britain’s example. In his words: “In Britain we had to be bold”.
In a message to his European counterparts, Mr Cameron argued his government’s efforts to tackle its deficit had “earned credibility and got (the UK) ahead of the markets”, and eurozone leaders should now take similarly decisive action.
The eurozone crisis was “weighing down business confidence and investment” across Europe, he said, and EU leaders had to “to show the leadership our people are demanding”.
“Tinkering here and there and hoping we’ll drift to a solution simply won’t cut it any more,” he said.
