Still No EURO Buyers

This EUR consolidation will not last that long. Once the market has gotten this weeks employment data out of the way, Capital Markets will be expected to refocus their energy on the Euro-periphery stress issues. Next week we have a Spanish bond auction, investors can anticipate the Government to pay up according to the recent Euro funding theme. This morning’s US jobless claims will have no bearing on tomorrow now revised NFP estimates. So far, mixed Euro-zone data this morning has had little affect on the currency. November retail sales disappointed at -0.8%, December economic sentiment improved to 106.2 while consumer sentiment fell to-11 and inflation printed above expectation. Paring of riskier positions ahead of any surprise tomorrow should be the order of today as the dollar dominates.

The US$ is stronger the O/N trading session. Currently, it is higher against 14 of the 16 most actively traded currencies in another ‘whippy’ O/N session.

Yesterday’s ADP print ( +270k vs. +100k) has most analysts revising their NFP expectations for tomorrow (+135k and +9.7%). Ordinarily, the market tends to discount ADP release because of its poor tracking capabilities. However, other employment indicators are supporting the upward employment trend and if we included the US tax extension announcement last month, it’s capable of providing substance to the report. It’s worth remembering that an ADP print excludes the government sector. Collectively over the last five months, the government sub-sector has lost approximately-220k jobs. Digging deeper, the hiring surge was focused on the small and medium sized sectors. Further proof that the corporate sector remains content in hoarding its cash and holding back on hiring. Other data showed that the US non-manufacturing sector continues to accelerate. The ISM December non-manufacturing index again beat market expectations (57 vs. 55.7) and posted its strongest growth in nearly five-years. The headline gain was driven by an acceleration in new orders (63 vs. 57.7), the strongest reading in five years. A note of caution, the employment index contracted on the month (50.2 vs. 52.7) and is in stark contrast with the ADP print. We can probably take comfort in the fact that the ISM employment gauges does not have a strong predicting track record. The service sector prices also accelerated, with the price index soaring to 70.0 from a 63.2 prior reading. The manufacturing and services readings suggest accelerating momentum in the US economy and fodder for the dollar bulls.

The USD$ is higher against the EUR -0.29%, GBP -0.26%, CHF -0.05% and JPY -0.25%. The commodity currencies are mixed this morning, CAD +0.17% and AUD -0.20%. Canadian consumer prices were up more than expected yesterday (RMPI +3.5% and IRRP +0.5% m/m) and their impact was limited. The market is focusing on today’s Ivey print and tomorrows North American employment reports rather than on yesterdays backward looking data (November release). The passthrough effects of producer prices into the Canadian CPI basket have been somewhat limited to date. It’s worth noting that ex-petroleum, the gain in IPPI would have been a uninspiring +0.2%. The loonie has taking flight on the back of its largest trading partners expected ‘re-acceleration in activity in the first few trading sessions of the New-Year. This week’s US data, PMI, factory orders and private employment reports, reinforces many analysts views that the US economy is beginning the year in upward momentum and reason enough for short term chartists to be eying 0.9750 CAD in the first quarter. This mornings Canadian Ivey PMI and employment data tomorrow is expected to surprise to the upside, coupled with Euro peripheral stress should further support Canadian government debt as an alternative to the dollar and the EUR. On the flip side, Governor Carney continues to highlights the dangers of a persistently strong domestic currency. Offers to sell dollars are beginning to gather above 1.0030 (0.9944).

The AUD is back below parity after Australian building approvals fell -4.2% m/m in November, in line with market expectations. The print came on the back of a downwardly revised +8.3% jump the previous month. Analysts expect property data to remain weak this quarter in response to Governor Stevens hikes late last year. Expect this weaker data to slow the pace of tightening, but unlikely to end the hike cycle as employment growth remains so strong. Policy members statements this week believe that the government’s stimulus measures will pressurize Governor Stevens to hike rates (4.75%) and that the flood in Queensland ‘may exacerbate already constrained supply conditions and lead to inflationary pressures’. These are good reasons supporting the currency on deeper pullbacks as investors seek to cross the currency vs. the EUR. Last year the currency rose +14% against the dollar which drove down the cost of imports and eroding exporters’ competitiveness. The currency has been trading under pressure outright as US Treasury yields climb, narrowing the yield advantage of assets down-under. Short term offers again appear above parity (0.9976).

Crude is lower in the O/N session ($90.27 -3c). Crude has reversed most of this weeks earlier losses as a surprising gain in the ADP report and growth in the services sector bolstered optimism that the US economy’s recovery is gathering sustainable momentum. With crude depreciating just over-2% from Monday’s 27-month high brought speculative demand. They believe the sell off was over done. The weekly EIA inventory report revealed that oil stocks fell -4.16m barrels last week, three times more than expected. At +335.3m barrels, inventories are above the upper limit of the average range for this time of year. Gas inventories increased by +3.3m barrels and are in the upper half of the average range, while distillates increased by +1.1m barrels. Again, there are too many hurdles to overcome ahead of the psychological $100 barrier crude. Technically, the market is not showing a tighter supply or demand balance. OPEC believes that supply and demand are ‘in balance,’ and expect demand growth will slow as the global economy struggles to recover, amid ample supplies. The market expects to meet price resistance above $90 as there is far more oil in storage, more fuel capacity and more idle oil wells to limit a stronger market rally in theory.

Gold prices fell yesterday, capping the biggest two-day loss in a year, on speculation that an economic recovery will curb demand for the metal as a haven. In the O/N session, prices are little changed. Fast money and the reducing of flight to quality positioning has been pressurizing the yellow metal, as equities, being used as an alternative, is providing more of an appeal in the first week of the New-Year. On deeper pullbacks, the commodity should remains better bid on speculation that currency volatility will boost demand for a safe heaven investment once the Euro contagion fears raise its ugly head again over the coming weeks. The commodity last year completed its tenth annual advance with bullion rallying +30%, it’s largest rally in three years. Even though the one direction trade feels overdone, investors continue to hold gold as a hedge against long-term inflation and have some strong technical support levels to breach before the markets witnesses a mass exodus. The Euro-zone contagion issues continue to put a floor on metal prices on demand for a haven. Technical analysts believe that gold ($1,373 +$5.40c) will outshine other precious metal in 2011 and peak somewhere above $1,600 in 2012.

The Nikkei closed at 10,529 up+149. The DAX index in Europe was at 6,989 up+42; the +FTSE (UK) currently is 6,069 up+25. The early call for the open of key US indices is higher. The US 10-year backed up 14bp yesterday (3.45%) and is little changed in the O/N session. Stronger private employment data in the US has the FI market on the back foot as we wait for tomorrows NFP release. Accommodative fiscal stimulus continues to pressurize the bond market and again give support to risk assets despite the Fed’s attempt to lower yields with their purchase program. Stronger fundamentals has the market believing that the Fed may ease up on QE2-let’s see what the employment reports are capable of bringing us.

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