Contagion PIIGS hurt EURO

It’s the ‘hurry up and wait’ mentality for tomorrows NFP release that will have many traders lightening positions today. This morning will be a non-event for rate decisions from both the BOE and ECB. King will stand pat at +0.5% and keep their APF (asset purchase facility) at 200b sterling. The life of any party, the predictable Trichet, will repeat their +1% decision, in fact the market is pricing in almost no chance of a hike for the next four meetings. His post communiqué could be interesting, any questions on the PIIGS spreads widening, which is having a direct negative effect of the EUR, could prompt a response like, ‘a stable EUR is good for Europe’ would boost the currency temporarily. The fear that contagion to Portugal and Spain has clearly increased and at the risk of rating downgrades, the EUR will trade under further pressure.

The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in another ‘volatile’ trading range.

Yesterday’s data is showing that the US services sector is returning to expansionary territory, however, the pace of growth in last months ISM non-manufacturing is ‘tepid at best’. The services sector pushed back into expansionary territory, 50.5 vs. 49.8, and at a slower pace than expected as employment, new export orders and imports all remained below 50 while the business activity component fell to 52.2. The report was in total contrast to the ISM manufacturing index which managed to deliver its strongest print in 5-years. Amalgamating the reports, the results show that US growth is accelerating, but at a very slow pace. Digging deeper, two sub-categories shined, firstly, new-orders jumped to 54.7, a good indication that business activity is probably on the rise. Secondly, the employment component improved to 44.6. Certainly a heads up for a weak services employment print in tomorrows NFP. The negatives, new-export orders continue to contract, which implies that the growth in total ‘new-orders’ is domestically driven. Imports fared no better by also contracting. Finally, the prices paid component aggressively rallied last month to 61.2 (highest print in 17-months). Analyst’s note that with input cost advancing supported by the PPI, its only time before it filters down to the consumer.

At least the ADP trend is heading in a positive direction for the US labor market. Companies slashed another -22k private jobs, in line with expectations, and the smallest headline print in 24 months, after a positive -61k revision for Jan. The report showed a decrease of -60k jobs in goods-producing industries, while the service sector added +38k workers (a second consecutive increase). How will this bode for tomorrows NFP? It will probably have no bearing at all, especially as various analysts are now predicting a possibility loss of just under -1m jobs when the government releases its annual revision.

The USD$ is currently higher against the EUR -0.34%, GBP -0.12%, CHF -0.28% and lower against JPY +0.25%. The commodity currencies are again mixed this morning, CAD +0.03% and AUD -0.36%. It is surprising to watch the loonies’ actions. Despite remaining well contained in its trading range and dropping from its strongest print in over a week, one would have thought that growth or commodity currencies would have come under more pressure. Especially after watching how other G7 currencies fared poorly vs. the dollar. With both equities and commodities threatening to break lower should automatically discouraging demand for currencies related to economic growth. It seems that loonie is waiting for tomorrow’s North American employment reports. Depending on equities and commodities, any CAD rally will have investors looking to sell some of their long positions. Currently, analysts believe the CAD is still overvalued and are targeting 1.0750-75 near term, a poor number tomorrow and will be print this in a hurry. Dealers are if anything small ‘short’ the CAD.

Australian retail sales unexpectedly fell in Dec. (-0.7% vs. +1.5%), the first time in five months, as consumers after three consecutive rate hikes, curtailed their spending habits. Earlier this week, the RBA kept rates unchanged at 3.75%, establishing a wait and see policy as they wait to experience the true impact of the earlier hikes. The AUD remains under pressure as the market absorbs their ‘surprise’ no action. There remains a lofty rate premium built into the currency after the successive hikes. Analysts now expect the currency to trade back down to the 0.8500 level over the next one to three months. Let’s see how the growth currencies react to tomorrows NFP numbers (0.8800).

Crude is lower in the O/N session ($76.32 down -62c). Crude prices were little changed after the surprisingly large build in oil inventories in yesterday’s weekly EIA report. Crude inventories advanced +2.3m barrels, beating expectations for a little change, w/w. With the report showing a smaller build than the earlier API print (+4.7m), the data affirms the markets concern that the demand for energy is weakening as the US economic recovery remains tepid at best. Refineries continue to struggle with the problem of excess supply and too-little demand. They are operating at 77.8% of capacity, down from 78.5% last week, a loss of -0.8%, w/w. Gas stockpiles fell by -1.3m barrels to +228.1m vs. an expected +1m increase. Also in the declining boat was distillate stocks (heating oil and diesel fuel), they fell by -948k barrels to +156.5m vs. an expected decline of -800k. Continued geo-political concerns in Nigerian continue to temporarily support the market. Any militia tension in an oil-rich region will only ever support global prices. Even the National weather forecast is giving the commodity a helping hand and predicting below normal temperatures for next week along the east coast of North America. Again for a second consecutive time, the crude print was the only bullish component of the report of the EIA. Look for better selling interest on upticks. Tomorrow’s NFP number will defy the commodities fate.

Stop the train I want to get off mentality seems to be occurring once again for nervous long gold positions. Gold prices has been trading with gusto, up and down like a yo-yo over the past few trading sessions after printing oversold lows late last Friday. The commodity once again has lost some of its luster as a rebounding greenback eroded the appeal of the metal as an alternative investment. With the dollar entrenched in an upward trend year-to-date should further pressurize the yellow metal. A percentage of dealers do not believe that the commodity downfall has run its course, even after two months of previous declines. Liquidation with a purpose will again have nervous investors seeking an early exit. With the EUR questionable and the dollar the ‘go-to’ currency, expect to see selling on upticks for the time being ($1,104).

The Nikkei closed at 10,355 down -48. The DAX index in Europe was at 5,630 down -42; the FTSE (UK) currently is 5,211 down -42. The early call for the open of key US indices is lower. The US 10-year note backed up 2bp yesterday (3.69) and are little changed in the O/N session. In reality US fundamentals are proving a challenge for higher FI prices. Bonds fell yesterday as the monthly ADP report showed that US companies cut the fewest jobs in two-years. Also providing pressure was the US government indicating that it will sell last Nov.’s record-tying $81b in notes and bonds next week (3’s $40b, 10’s $25b and 30-years $16b). Expect today to be rather light ahead of tomorrow’s data. Dealers continue to be better sellers on upticks to absorb next week’s supply.

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