Cross Border Dollars Temporarily Diverge

The ‘big’ dollar remains the go to currency. The market seems to be shifting away from wanting to own it solely as a risk aversion strategy, to one where the buck is being used as an investment currency while the EUR trades as the funding vehicle. Whatever the reason the currency has garnered further support after a stronger than anticipated payroll print. The dollars neighbor and largest trading partner, Canada, has lost some of its shine after its own job report saw the unemployment rate tick to an eight-month high (+7.5%). Friday was not the day to want to own this ‘growth proxy’ currency outright. The crosses have been working in its favor to at least stem its cross-border slide. Next weeks refunding requirements by Italy and Spain again will dictate all dollars direction.

Below are some other highlights of the week:

Americas

• US: ISM index rose to 53.9 in December (6 month high) from 52.7 the month prior (historical average about 51). Orders, production and employment were all up, a good sign that the US economy accelerated last quarter. Analysts note that “the data isn’t signaling a dramatic change in the hard data, which has consistently outperformed the indicators for some time”.
• USD: The FOMC minutes did not have a major impact on markets. The key new news was that the Fed will now publish Fed funds forecasts on a quarterly basis when it provides other economic projections (next round due after the January 24-25 meeting). Officials would provide forecasts for the first hike. However, with rates expected to remain near zero until the middle of 2013 is not much of a market concern.
• USD: Construction spending rose +1.2% in November after a -0.2% decline the month prior.
• USD: US factory orders grew for the first time in 3-months increasing by +1.8% in November from previous months to +$459.18b. Non-defense aircraft orders were up +73.9%; ex-transport orders up +0.3%; orders for non-defense capital goods ex-aircraft down -1.2%.
• USD: ADP saw an outsized jump in the employment report of +325k gain, far exceeding the median estimates of +178k. Historically, the print has technical issues and in the past has overshot the government by a wide margin.
• USD: Last week was the eight time in nine weeks that initial claims came in below the psychological +400k print. Claims fell by -15k to a seasonally adjusted +372k (a strong positive sign for an economic turnaround).
• CAD: Canadian producer prices (+0.2%) and the cost of raw materials (+3.8%) advanced in November ahead of market expectations, largely the result of higher fuel bills. A weak loonie also played a role in pushing industrial prices upwards.
• CAD: Purchasing activity expanded from November. The IVEY PMI was at 63.5 on a seasonally adjusted basis in December.
• USD: Crude supplies rose +2.21m barrels last week to +329.7m
• CAD: Canadian employment showed a stronger headline print (+17.5k) than consensus (+15k) in December. The unemployment rate ticked to an eight-month high of +7.5% (full-time -25.5k, part-time +43.1k). Average hourly wages +2.2%, y/y, but hours worked took a hit which is not good for GDP.
• USD: US payrolls beat all expectations, printing +200k job gains versus expectations of +155k. Even better, unemployment rate fell -0.2% to +8.5% and stronger than Novembers retreat because +176k became employed while only -50k stopped looking. In the revisions; November lost -20k, while October gained +12k, accumulating in a net loss of -8k for the two months. “Some of the strength in this report should be discounted because of an seasonal quirk in the courier category of payrolls (Fed-ex, UPS, etc). Jobs in this sector jumped 42,000 in December, repeating a pattern seen in 2009 and 2010 (see attached figure). We should see a payback in next month’s report.

EUROPE Week in FX

ASIA Week in FX

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