NFP to surprise Forex!

The votes are in, the numbers are tallied. Will we get what market consensus demands for NFP? There are only so many Government employees to be hired for political conventions! Market expects a 75k loss, can we say higher? A week not for the ‘faint of heart’ cannot end soon enough for the masses.

The US$ is stronger in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies in another ‘volatile’ trading range ahead of NFP.

Yesterday’s US initial jobless claims did not deviate too much from market expectations. Claims rose to +444k vs. +422k w/w, while the number of Americans continuing to collect benefits increased to 3.435m. The deteriorating job market continues to erode future consumer spending. Combined with this weeks private ADP unemployment report (-33k), its expected that this morning’s NFP will once again show an 8th straight month of payroll declines (-75k). A positive surprise for the greenback was the non-manufacturing ISM unexpectedly expanding last month (+50.6 vs. +49.5, m/m), inspired by the biggest drop in prices in 2-years. The cheaper USD during that period contributed to the gain, but, the Fed pointed out this week that growth and consumer spending across most of the US was slow last month, preventing further expansion. It’s worth noting that prices paid fell to 72.9 (2nd straight decline from a record high in June), while new orders climbed to 49.7 from 47.9. The employment sub-index weakened to 45.4 vs. 47.1 (the 4th straight decline). Overall consensus is that the data is consistent with very slow growth in the US economy, the tune has not changed, and the emphasis remains on how other economies are handling the fallout.

No surprises from the BOE and ECB rate decisions yesterday. As anticipated both remained on hold at 5.00% and 4.25% respectively. Similar themes influenced both their decisions; policy makers judged that inflation outweighed the risk that their economies are sinking into a deep recession. Of the two, Governor King at the BOE is under more pressure. Already this week, the Chancellor of the Exchequer Darling said that Britain faces ‘arguably the worst’ economic conditions in 70 years. House prices are collapsing unemployment growing, but, Governor King is trying to tame inflation, which he believes may accelerate from the current 4.4% (that’s double their desired target). Until there is some indication of relief from prices, their hands are tied. The UK economy is arguably already in recession, and it will only be a matter of time before monetary easing commences. One should expect Cable to remain under pressure for the foreseeable future. In Trichet’s communiqué, his comments were similar to what we heard last month. But, analysts believe there were some subtle changes that signal a less ‘hawkish’ tone. Firstly, they talked about the upside risks to price stability, omitting the word ‘increasing’. Secondly, the description of recent activity indicators is less optimistic than in Aug. Policy makers admit that the decline in GDP growth is not just a technical correction but also the result of a cyclical slowdown. Finally, he did mention that credit to non-financial corporation’s remains robust, a sign that credit conditions are now tighter and affect all sectors.

The US$ currently is higher against the EUR -0.59%, GBP -0.28%, CHF -0.43% and lower against JPY +0.75%. The commodity currencies are mixed this morning, CAD +0.00% and AUD -1.14%. A fairer value for the loonie was established yesterday one day after the market was caught off side by the ‘doveless’ Governor Carney actions. He kept O/N lending rates on hold at 3.00% and his following communiqué was less dovish than the market had anticipated. Rates remain ‘appropriately accommodative’ amid slower than expected economic growth. The strength of the greenback and spiraling commodity prices managed to influence a weaker loonie despite rumors of IBM looking to purchase Nortel. This morning North American employment data should provide more fireworks after this data laden week. Market consensus has Canadian employment rebounding from last months eye popping and disappoint headline (-55k), to print a positive number, but one should expect the unemployment rate to rise a tick (6.2%). With plummeting commodity prices expect the currency to once again come under some renewed pressure, traders for the time being are better buyers of USD’s on pull backs.

The AUD declined to its lowest level vs. the JPY as a decline in global equities persuaded investors to sell higher-yielding assets (7.00%) financed in Japan’s currency (0.50%). Australian fundamentals remain weak, and the general strength of the greenback (0.8129) and softer commodity prices will encourage traders to sell AUD on rallies.

Crude is lower O/N ($106.06 down -188c). Despite a bullish EIA report for crude prices yesterday, the market was unable to advance, highlighting the pressure that commodity markets remain under. The report showed that inventories dropped last week as Hurricane Gustav approached the Gulf of Mexico. Crude-oil stockpiles fell -1.9m barrels to 303.9m w/w. Prior to hitting land, petroleum companies halted 96% of offshore oil production in the Gulf and limited their refinery capacity in preparation for the storm. Traders were happy to discount this information as tropical storms historically impact the arrivals of tankers and refinery activity. Futures traders are conscious of other hurricanes brewing and this downward spiral may not be sustainable for the remainder of the hurricane season. The market will have to contend with Ike, Hanna and Josephine over the coming days. The overall market strength of the greenback has indeed contributed, but the fact remains, investors are loosing their appetite for the black stuff. It looks like OPEC wants to maintain this downward pressure (they supply 40% of the world’s crude) by keeping their foot on the oil production peddle to maintain this record setting pace. All this despite some members (Venezuela and Iran) wanting to trim supplies at its Sept. 9 meeting in Vienna. Gold continues to trade heavy ($797) on the back of spiraling energy costs coupled with a strengthening greenback reducing the demand for the ‘yellow metal’ as a hedge against inflation.

The Nikkei closed at 12,212 down -345. The DAX index in Europe was at 6,169 down -109; the FTSE (UK) currently is 5,263 down -98. The early call for the open of key US indices is lower. Yields of the US 10-year note eased 10bp yesterday (3.61%) and are little changed O/N. Treasuries prices have ‘stayed’ their weekly course and remain better bid after yesterdays government reports revealed that unemployment claims printed 5-year highs. With global equities remaining in the red, investors have been seeking sanctuary in the FI market. Let’s see what NFP has to offer this morning.

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