Currency wars on hiatus as Jobs take center stage

What is the market focusing on in today’s NFP report? Is it the headline print? The private sector payroll number? Perhaps it’s the unemployment rate? Capital Markets is looking for a below consensus gain of +25k private sector payroll jobs, an increase in the unemployment rate to +9.7% with a flat headline print. This week’s softer ADP print certainly supports this forecast. It seems that the 10% unemployment rate is only a matter of time. It’s not just the employment report we have to deal with, the IMF, World Bank and G7 finance ministers meetings this weekend is expected to keep trading within a tighter range today. Next week the blame game can start for the currency war.

The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in a ‘subdued ’ trading range ahead of the jobs report.

Unlike the disappointing private ADP report, US weekly jobless claims unexpectedly retreated yesterday (+445k vs. +455k), keeping intact the month long downward trend of initial jobless claims. By day’s end the report does not provide a material change to the job situation, however it provides optimism for better things. The headline was the strongest print attained in three months. Digging deeper, continuing claims fell by-48k to +4.462m. That is the lowest level reached in four months and the fourth consecutive retreating week. On the flip side, the number receiving extended (+1.01m) and emergency benefits (+4.1m) increased +99k and +157k respectively and happened to reverse some of the previous week’s declines. It’s worth noting that these are the biggest weekly gains in three months.

The USD$ is higher against the EUR -0.15%, GBP -0.15%, CHF -0.13% and lower vs. the JPY +0.08%. The commodity currencies are mixed, CAD +0.06% and AUD -0.69%. The loonie took it squarely between the eyes yesterday ahead of its own employment report this morning. By default the currency had been steadily appreciating vs. the dollar, but certainly not at the same pace as the other major currency pairs. Yesterday’s data did not help the currency’s cause in any shape or form. Canadian building permits plunged -9.2% in Aug., five times more than analysts expected and the most in ten months. The demise of the greenback had the CAD threatening parity earlier this week as the general economic strength of Canada coupled with the commodities that she possesses provided a bullish backdrop for the currency. Analysts believe there is a risk towards a stronger employment report this morning, which would provide further support for the market to own the CAD on USD rallies. For most of last month the market had begun questioning the ‘true’ strength of the Canadian Economy after the last few data releases came in much softer than expected. As of this week analysts are predicting slower inflation and a ‘more gradual pace of BOC lending rate increases than they did a month ago’. That been said, interest rate differentials is not the primary reason for wanting to own the currency. The ongoing threat of QE2 continues to gives all major currencies a leg up on the ‘historical reserve currency’. So eyes down and let see what happens on the job front.

The AUD is another growth interest sensitive currency threatening to print parity vs. the dollar. The Aussie is heading for its eight weekly gain, the longest winning streak in sixteen months. A stronger employment report down under managed to push the currency to new heights vs. the greenback earlier this week. Australia’s employers added +49.5k workers, and holding the unemployment rate steady at +5.1% in Sept. Month-to-date, the AUD has climbed +8% vs. the buck as the data fueled bets that the RBA will raise interest rates before the year ends. The currency has gained ground against all of its major trading partners as the ‘vix index’ of volatility softened, boosting investor appetite for assets tied to growth. ‘Clearly what happens in the Australian economy is now more dependent upon what happens in China’. Investors are better buyers on deeper pullbacks as the interest rate differential continues to be of appeal for alternative investments (0.9764).

Crude is a lower in the O/N session ($80.98 -69c). Oil slipped from its five-month high yesterday as the dollar gained some traction ahead of North American employment data. A greenback strengthening reduces the appeal of commodities as an alternative investment. Yesterday’s move had nothing to do with inventories or demand. It was a plain vanilla dollar move. This week’s inventory report was mixed, a little bearish for oil and bullish for the products, that said, the focus remains on pending QE strategies been implemented by different governments. Crude supplies climbed +3.09m barrels to +360.9m, leaving stockpiles +13% higher than the five-year average. Analysts had expected weekly inventories to rise by +413k barrels. In contrast, gas stockpiles fell -2.65m barrels to +219.9m. Supplies of distillate fuel (heating oil and diesel) slipped -1.12m barrels to +172.5m. Refiners reduced their operating rates by -2.7% to 83.1%. In fact, the drop in refinery runs has probably caused the drop in fuel supplies. Also of note was the drop in fuel consumption, falling -6.4% to +18.5m barrels a day (the biggest weekly decline in nearly seven years). Gas demand also fell -4.2% to +8.99m barrels a day. Until the report, higher inventory supplies had been the biggest inhibitor for a market advance over the past quarter. The market remains wary that the underlying fundamentals have not changed, but the dollar value continues to dictate the direction of commodity prices.

Despite everything, Gold is a commodity in demand even at record highs. That being said, the weight of the over crowded, one directional trade was due for a correction and yesterday was prime time ahead of this morning’s employment report. From a technical perspective, there was no support for gold at the record high prices. With market confidence wavering in currency prices and with free money it’s making the commodity very attractive on deeper pull backs. Aiding the trade has been the collapse of the dollar vs. its major trading partners. Any time that governments are in the business of printing money then the commodity is bound to do well. Gold has outperformed global equities and treasuries, prompting record investment in gold-backed exchange-traded products. Year-to-date, the yellow metal has managed to climb +22%. A concern about the strength of the dollar coupled with the sustainable growth issues of the US economy has investors seeking protection in an asset with a ‘store of value’. With the Fed on the verge of implementing further QE programs ‘tend to be supportive of asset prices and is fueling concerns about the potential longer-term inflationary affect of such measures’. The opportunity costs of holding gold are low due to falling interest rates, by default, the market should expect better buying of the metal on pull backs ($1,333 -$1.20c).

The Nikkei closed at 9,588 down -95. The DAX index in Europe was at 6,265 down -13; the FTSE (UK) currently is 5,643 -18. The early call for the open of key US indices is lower. The US 10-year eased 3bp yesterday (2.37%) and is little changed in the O/N session. Longer-term debt is the winner on the US curve, leading advances, as traders speculate that the Fed will increase their purchases of debt. Bernanke said earlier this week that the ‘first so-called quantitative-easing round has improved the economy and more purchases would ease financial conditions’. QE2 fundamentally will keep yields low. Yesterday’s weekly claims report provided little change to the curve. Let’s see what NFP brings us this morning.

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