Stressed Euro, Slow China, and Growing U.S. Cause FX Problems

This week is expected to be light on the U.S. indicator front, but notable consumer sector numbers will be announced. After last Friday’s better-than-expected employment report, traders will be looking to see if the consumer sector gains in other aspects.

Will tomorrow’s JOLTS (Job Openings and Labor Turnover Survey) report continue the strong payrolls trend? On the last go-around, retail sales fell in December, supported by lower gas prices and a very volatile auto sales sector. Analysts are suggesting that the market could see more of the same, but with the underlying trend still relatively healthy. To date, U.S. consumers’ mood have been relatively strong, which puts emphasis on the University of Michigan/Thomson Reuters consumer-sentiment index for February that’s due at the end of the week.

NFP Broke All Barriers

Stronger jobs data in North America, and especially in the U.S., produced much higher growth in jobs than market participants had been expecting, and more importantly, a rise in wages. This news was enough to support the mighty USD to push on to new heights and ranges. Excluding the aforementioned JOLTS report, other reports that will come out include: U.S. retail sales and jobless claims, China’s consumer-price index, European Union gross domestic product, a Bank of England inflation letter, details on the Group of 20 summit and Eurogroup meetings, Great Britain manufacturing production data, and French industrial production numbers. No central banks, but enough data to keep market participants busy.

Greenback Leans on Precious Metals

The “blockbuster” jobs report heightened expectations that Federal Reserve Chair Janet Yellen and company will have the confidence to hike interest rates this year despite other nations’ ongoing struggles. Last Friday saw a massive jump in U.S. short-term rates after the headline job print, while U.S. benchmark 10’s backed up a massive +30bps, to just under +2%. Higher U.S. yields will always make the dollar very appealing. The USD gathered momentum closing out the week, and now starts on the front foot. The inverse relationship for precious metals to the U.S dollar and rates continues to hold true: precious metals are sliding lower as U.S. rates rally higher.

Central Banks among the Mix

Europe spent much of last week again stunned by the Greek crisis. As the Greek government began talking details of a new financial plan with European officials, the European Central Bank (ECB) cut Athens off from the cheapest available funding for its struggling banks. Nevertheless, the possibility of Greece exiting the eurozone is on the rise as Greek Prime Minister Alexis Tsipras continues to harden his election pledges to “roll back austerity and reject any bailout program extension.” It’s not too much of a surprise to expect the forex market to want to begin this week on more of a cautious note, as global event risks again appear to be building from Greece to China.

Mind you, the ECB is not playing it easy either. E.U. partners are demanding that Greece stick to its prior agreements through an extension of the current bailout program. The ECB sent a clear signal last week by refusing to accept any more Greek government bonds as collateral for loans, forcing Athens to use the emergency liquidity assistance facility for short-term liquidity (at a cost of +1.5% compared to +0.005% for the repo facility). The decision effectively grants the ECB the ability to turn off the country’s funding on short notice and increases the pressure on the Greeks to cut a deal before the February 28 deadline when the current program expires.

Investors will pay close attention to the upcoming meeting of the G-20 finance ministers and central bank chiefs today, and the Eurogroup gathering of finance ministers on Wednesday. The latter will hold an extraordinary meeting in Brussels to map out a solution to the debt standoff with Greece’s new anti-austerity government before the country’s bailout expires at the end of the month. That meeting takes place a day before a full E.U. summit.

Market Gun Shy of SNB’s Jordan

After Swiss policymakers dropped the EUR/CHF floor a number of weeks ago (€1.2000), there is great “uncertainty and lack of confidence” over their policy stance. Swiss National Bank Chairman Thomas Jordan indicated over the weekend “a willingness to remain active in forex as well as take interest rates into negative territory.” Ultimately, the success of the SNB’s actions will be judged by how this stands up as opposed to a number of months of intervention data.

Chinese Components Deteriorate

Trade data from China showed exports and imports weaken sharply. China’s January trade balance hit a record high surplus (+$60.0 billion versus $48.9 billion) as components deteriorate (exports, year-over-year: -3.3% versus +5.9%; imports, year-over-year: -19.9% versus -3.2%). There is a natural risk of the CNY currency to depreciate.

Last week, the People’s Bank of China delivered its first Reserve Requirement Ratio cut in three years after the Chinese January manufacturing purchasing managers’ index (PMI) contracted for the first time in two years, and a non-manufacturing PMI hit a one-year low. Softer data from the world’s largest economy is beginning to worry more of the market.

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