PD is a Short Seller of the EUR

Political diversity is a short seller of the EUR. Trichet can continue buying Portuguese and Irish bonds and prevent contagion, however the ECB’s actions will not save the Euro-zone alone. Capital Markets expected a QE solution from Euro policy makers last week. Why? They do not need to address weak growth and low inflation in the region, but a market which that has mispriced assets to a degree that there might be broader systemic risks. Their role is to provide liquidity not a resolution to a political crisis. All eyes will be on the Irish budget vote tomorrow. The improvement in global risk appetite late last week relied on expectations that the budget will be passed. An unsuccessful vote outcome will trigger an early election, pushing back the implementation of the ECB/IMF rescue plan, promoting more risk aversion and dumping of the EUR.

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 ‘volatile’ trading range.

Friday’s anemic net gain in jobs came despite analysts gradually showing more optimism of late. Weekly initial unemployment claims have recently been trending lower and has had little influence on the job scenario. On both the headline and the details, job growth disappointed. A gain of only +39k jobs reverses the optimism that had crept into markets following the acceleration in job gains for October. It’s now expected of helicopter Ben and the Fed to complete its full +$600b purchase program and perhaps even expand it. With an uptick in the unemployment rate, the Fed’s exit strategy looks a long way off. Digging deeper, the previous months revisions had little affect. They were revised only +38k higher, and were split between a stronger gain of +172k in October (151k initial print) and fewer jobs lost in September (-24k vs. -41k initial). Aggregate hours worked were up +0.1% m/m, moderating from +0.4% growth posted in October. The unemployment rate backed up two-tenths to +9.8%. The private sector added +50k, with gains concentrated in the services sector. Overall, the number of full-time jobs was down, a decline offset by increased part-time hiring and self-employed.  

The USD$ is higher against the EUR -0.90%, GBP -0.60%, CHF -0.76%and JPY -0.07%. The commodity currencies are mixed this morning, CAD +0.34% and AUD -0.02%. The loonie ended Friday’s session little changed after the weaker than expected North American employment reports. The currency has had to deal with much ‘noise’ again last week. Potential mergers, takeovers and Cbank interest happened to push the currency towards parity with its largest trading partner, even stronger risk appetite boosted stocks and commodities and reduced the demand for havens such as the dollar. The degree of strength of the CAD is at odds to what has been happening elsewhere and that tends to lead to speculation of customer flow execution. Dealers will be looking towards tomorrows BOC interest rate announcement. After the softer jobs data, its unanimous that Governor Carney is expected to remain on hold at +1% well into the New Year. For the time being, the loonies demand remains a function of investors risk desire and not on its softer fundamentals of late.

The AUD has ended its three day rally ahead of the RBA rate meeting this evening, partly on speculation that policy makers will signal they are in no hurry to increase interest rates (4.75%). The growth currency also came under pressure on concern that the sovereign-debt crisis in Europe will damp demand for higher-yielding assets. Traders have pared bets on any rate increases down under after Governor Stevens stated late last month ‘there’s unlikely to be anything from us imminently’ on borrowing costs. Weaker domestic data has also curbed the currency gain of late, retail sales unexpectedly declined in October (-1.1%) and imports slumping to the lowest level in nine-months (-3%). A tighter monetary policy by the RBA over the last year has encouraged a +7.4% gain in the currency vs. the dollar and the second best performer among the 16 major currencies. Demand for Australia’s currency has also damped as signs that China’s economy is accelerating fueled speculation the PBOC will take more steps to slow it down. The Chinese have indicated that they will strengthen liquidity management and ‘normalize’ monetary conditions, damping demand for higher-yielding currencies. With them concentrating on containing strong inflation rather than boosting growth will affect commodity sensitive currencies longer term. As the leading commodity currency, the AUD is highly vulnerable to any Chinese monetary actions and risk aversion strategies (0.9871). There is stronger market interest to sell AUD on rallies.

Crude is higher in the O/N session ($89.24 +5c). On Friday, crude rallied for a third consecutive day, printing its highest price level in two-years on the back of a weaker dollar index and with investors shrugging off a disappointing employment report. They focused on the recent stronger fundamental releases that signal that the US economy s growing, albeit at a slower pace. Investors have also dismissed last weeks surprising increase in weekly stock levels. Oil inventories rose +1.1m barrels last week vs. an expected decline of -1.1m. Gas stockpiles rose -600k barrels compared to expectations for no change, while stocks of distillates (heating oil and gas) fell by -200k barrels, analysts had expected a -1.1-million-barrel drop. Demand for oil and fuel products has fallen to the lowest level since mid-October. The increase follows two consecutive months of mostly steady declines after levels reached 27-year highs in September. The market continues to look past the increases and is focusing on the improving economic data in the US and China, as well as a weakening dollar. Also aiding prices is Goldman predicting that a second stage recovery in oil markets will occur next year ahead of oil prices trading above $100 in 2012. Next stop, investors will become weather experts as European deals with an unseasonable cold snap.

On Friday, Gold rose for a fifth consecutive day after the dollar weakened, boosting the appeal of the precious metal and commodities as alternative investments. Bullion climbed more than +3% last week, its biggest advance in seven-months. Even with the dollar strengthening in the O/N session, the commodity remains supported by the persistent concern over Euro-zone debt levels and with NFP barely growing last month, with the jobless rate unexpectedly hitting a seven-month high, should create more US deficit spending and support for the metal. To date, debt contagion has driven investors into the third ‘reservable’ currency as they seek a store of value. Despite the fear that China will tighten their monetary policy next year, a move to curb speculation and dampen inflation, global demand remains robust. Even though the one direction lemming trade seems to be overdone, investors continue to hold gold as a hedge against currency debasement and long-term inflation. The Euro-zone backdrop puts a floor on gold prices as these pullbacks have been somewhat supported on demand for a haven in the midst of Europe’s sovereign-debt crisis. Year-to-date, the metal is up + 24.3% and is poised to record its 10th consecutive annual gain ($1,414 +$8.20c).

The Nikkei closed at 10,167 down-11. The DAX index in Europe was at 6,953 up+6; the FTSE (UK) currently is 5,741 down-4. The early call for the open of key US indices is lower. The US 10-year backed up 5bp on Friday (3.01%) and eased 8bp in the O/N session (2.93%). Yields have been pushed all over the place in the last two trading sessions. Despite a weaker employment report, concerns initially eased that the Euro debt crisis would spread coupled with US growth reports last week weighed on owning Government debt. Bernanke’s comments that the Fed may boost purchases of the securities to prop up the recovery, again has pushed yields down from their four-month low. Dealers will want to steepen the curve ahead of this week’s Government auctions ($66b-3’s, 10’s and bonds) to take down supply. While fundamentals have improved, there is still much uncertainty out there and Bernanke and other policy makers continue to buy which will limit yield rises.

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