Highlights
- The US Dollar turns a corner; gold melts
- JPY to reprise as the FX punching bag
- Four central bank meetings next week
- NFP beats, but buyer beware
- Key data and events to watch next week
The greenback looks to have made a significant reversal as we head into the year-end. The proximate catalyst was a better than expected November jobs report (see below), which saw Fed interest rate expectations move up, but the move was unfolding from earlier in the week as USD/JPY staged a sharp rebound. In a twist to the normal 'risk on' reaction, stock markets failed to sustain initial gains and continued to show signs of stalling below recent highs. The failure in shares may stem from multiple causes: the USD rebound may have driven risk positioning out; accelerated rate hike expectations may have damped investor sentiment; year-end profit-taking/position reductions; technical exhaustion as new highs fail, take your pick. But for the USD it was a one-way ticket higher.
We remain cautiously optimistic that a medium-term (i.e. multi week) low has been made in the dollar, but there are still a few hurdles to get over. In terms of USD reversal positives, we would first note the massive spike low reversal in USD/JPY from just below 85.00, along with a potential double top in EUR/USD at the 1.5140/50 level. USD/JPY looks a bit more technically convincing in terms of a reversal than EUR/USD and others, having regained the 87.50/88.00 break down level, as well as breaking above trend line resistance from the 97.80 highs back in August at 89.50/60, but it faces resistance from the Ichimoku cloud above at 90.65. From the fundamental side, the argument for a weaker JPY is even more compelling (see below). We would be buyers of USD/JPY on any pullbacks, ideally in the 89.00/50 area. Returning to EUR/USD, the 1.4850/80 area is shaping up to be the key support level to confirm a potentially significant price reversal. As of Friday, the daily Ichimoku Kijun line was at 1.4885; the weekly Tenkan line is at 1.4863; the 55-day sma is at 1.4855; and the long-term daily trend line from the 1.2480 lows comes in at 1.4870/80. The top of the daily Ichimoku cloud is a touch lower at 1.4823, while the cloud base is still lower at 1.4620. Daily closes below those levels would give us greater confidence of a USD recovery. (As this was being written on Friday afternoon, EUR/USD tested lower to around 1.4820/25, but we'll leave the above in as we haven't seen the close yet.) The fundamental backdrop for the USD is somewhat less compelling, but for the moment, with USD short-positioning remaining at excessive levels, we think there may be more USD gains into the end of the year.
Gold absolutely imploded on Friday after a parabolic crest just over $1200/oz and we feel quite comfortable suggesting that a major top in gold has been seen. The weekly candle shows a massive 'shooting star' reversal pattern which, along with a failure above the psychologically important 1200 level, adds to our conviction. Market talk is of massive stop loss selling orders below 1150 and again at 1130. The 21-day sma at 1153 has so far contained the losses. Daily close weakness below 1130 suggests further downside potential to the 1030/50 area.
JPY to reprise as the FX punching bag vs. the EUR in the approach to Nov MPC
At the beginning of the past week, the BOJ held an emergency meeting and announced plans to inject JPY 10 trillion (about $111 bio) into credit markets in the hopes of spurring bank lending. JPY strength was also an issue, as it undermined stocks, investor and corporate confidence, and raised the prospects for another deflationary spiral. The BOJ policy move sent JPY LIBOR rates lower, pushing them below USD rates for the first time since the end of August. That reversal put the JPY back in the spotlight as the primary funding currency for leveraged investors (hedge funds, CTA's, etc.) Talk now is that the government will next week unveil another stimulus package of a further JPY 10 trillion. Taken together, the JPY has more ground to lose in the weeks ahead. JPY-crosses should also come back into play as a leading 'risk on/risk off' barometer, once the USD-short covering spree has run itself out.
Four central bank meetings next week
Next week sees rate decisions from the central banks of New Zealand, Canada, Switzerland and the UK. None are expected to change benchmark interest rates, but there will likely be some fireworks nonetheless. The Bank of Canada is up first on Tuesday morning and markets will be watching for any change to the pledge to hold rates steady until the end of the 2Q as well as any warnings on CAD strength. We expect BOC Gov. Carney to maintain the pledge and to caution again on CAD strength. On Thursday, the RBNZ leads off, and we also expect the RBNZ to affirm that rates are on hold until 2H 2010 and to try to talk down Kiwi. The SNB is next, and we will be looking for further pledges to prevent the CHF from strengthening against the EUR, which may spur another bounce in EUR/CHF. Last is the BOE and the focus will be on any further expansion of the asset purchase plan from its current GBP 200 bio. We think it's too soon for the BOE to render a decision--that's more likely in Jan. or Feb--so it may be the briefest of statements, but BOE meetings have a way of surprising calm expectations.
NFP beats, but buyer beware
There is no doubt that the November US employment report at face value is constructive for the short-term economic outlook. The headline absolutely blew away expectations by printing a mere -11K drop in jobs. The market was looking for something closer to -125K, so the surprise was palpable. If that wasn't enough to whet the risk appetite, the prior two months saw a net revision of 159K all while the unemployment rate fell to 10.0% from 10.2%. It is rather strange to be celebrating a double-digit unemployment rate and a net job decline, but this is how far we've come from fears of Depression 2.0, it seems.
The leading indicators in the report continued to improve as well. Temporary employment jumped another 52K on the heels of a 44K add the prior month and is now up four months in a row. This is the sector that leads overall hiring as firms feel their way out of a recession by not committing to full-time employees. Another key leading metric, aggregate hours worked, posted a 0.6% monthly increase. This was the largest one-month gain since 2005 and given that hours lead bodies during recoveries, is a welcome sign for the bulls. Indeed, with today's report, we would not be surprised to see the NBER declare the end of the US recession somewhere in 3Q 2009. This would be a midpoint between the trough in output in 2Q and what seems to be the trough in employment this quarter.
The overwhelming problem with the November employment report, however, is that it does not jive with other employment metrics we have in hand for the month. The largest discrepancy is in the services sector.
While the services component in the NFP showed a 58K gain in jobs for the month, the ISM non-manufacturing report told a different story. That employment sub-index remained at an extremely weak 41.6 in November and well below the 50 threshold that denotes expansion. In terms of the unemployment rate, seasonality could have played a major part. The decline to 10.0% was despite the Conference Board labor differential (jobs plentiful minus jobs hard to get) dropping to a new cycle low on the month and true continuing claims (state and federal programs) remaining sticky above 10 million. This suggests caution is warranted and that we could be setting ourselves up for a sizeable upward revision in the unemployment rate and commensurate downward revision in NFP when the December data are released. Until that report confirms some real underlying strength in the US job market, caveat emptor.
Key data and events to watch next week
The economic calendar in the US slows down a touch, following a very busy week. Monday kicks it off with consumer credit while Tuesday has the NFIB (small business) survey due out. The usual crude oil inventory data along with wholesale inventories are up on Wednesday. Initial jobless claims and the trade balance highlight Thursday, while Friday brings the all-important retail sales report, business inventories and the University of Michigan consumer sentiment index.
The Eurozone calendar is also on the lighter side. Monday leads it off with the investor confidence index and German factory orders. French business confidence is up on Tuesday while Wednesday brings the German trade balance and German consumer prices. French employment rounds out the week on Thursday. Look out for multiple ECB speakers on deck next week as well.
It is an important week in the UK. The retail sales monitor, industrial production and the NIESR GDP estimate come out on Tuesday. Consumer confidence and the trade balance, meanwhile, are scheduled for Wednesday. The highlight of the week is Thursday with the Bank of England rate meeting. The market is expecting no change to the 0.5% rate or the 200 billion asset purchase program size. A surprise increase in the purchase program would likely see GBP weaken discernibly. Producer prices round out the week on Friday.
Japan sees a characteristically light week. The trade balance kicks off the action on Monday while the index of leading economic indicators and GDP are due Tuesday. Machine tool orders are on deck Wednesday while consumer confidence closes out the week Friday.
Canada has important top-tier events lined up as usual. Building permits start the week off on Monday. Housing starts and the Bank of Canada rate decision are on tap for Tuesday. The BOC is expected to leave rates unchanged at 0.25% and stick to their pledge that they will not move rates until the middle of next year at the earliest. Better than expected data of late, however, could nudge up the risk of this happening sooner rather than later. International trade data is up Thursday while new home prices close out the week on Friday.
It is a relatively busy week down under. In Australia we have business conditions, net exports and consumer confidence up on Tuesday and the all-important employment report on Thursday. New Zealand sees manufacturing activity on Monday and international trade on Tuesday. The RBNZ is also scheduled to decide on interest rates on Tuesday and the market is looking for a steady 2.5% (more on this above).
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