Traders continued to sell U.S. dollars over the past 12 hours as they begin to lay on positions ahead of Friday's non-farm payrolls report. Expectations for November's report are high with some people on the street even whispering about a positive number. We highly doubt that the U.S. managed to return to job growth last month but we do believe that job losses moderated significantly. This morning, Challenger Grey & Christmas reported a 72.3 percent drop in layoffs while ADP reported a 169k decline in private sector payrolls compared to the 195k in October. Along with the sharp improvement in jobless claims last month, there is a good chance that non-farm payrolls dropped by less than 125k and possibly even 100k. However to be more certain, we will have to wait for Thursday's service sector ISM report.
In the meantime, it is important to recognize that the sell-off in the U.S. dollar is beginning to find some near term support. For example, the Australian and New Zealand dollars have barely managed to extend their gains while the euro, Japanese Yen and Canadian dollars are weaker against the greenback. This suggests that in order for the EUR/USD and other currency pairs to make a fresh push higher, we will need a catalyst. This could come in the form of the Beige Book report which is due for release at 2pm ET. However if the Beige Book report fails to move markets, which is feasible since nothing new is expected from the Fed, the focus will turn to the non-manufacturing ISM report. Yesterday we learned that the manufacturing sector expanded at a slower pace and if the service sector does so as well, the U.S. dollar could suffer.
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A rise in UK Nov construction PMI to 47 from 46.2 and Hawkish comments from BoEs Dale about the UK recovery being on track did help sterling recover from its session lows. GBPUSD hit the 1.6560 target and now looking to break above the 1.6630-40 trend line again. Only a close above 1.6660 would be deemed successful break. WATCH ASHRAFs INTERVIEW on FX, oil, Dubai fallout and equity indices
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UK Construction PMI data printed at 47.0 versus expectations of 46.9 and a reading of 46.2 the month prior indicating that the housing sector is improving albeit at a very slow pace. Construction remained below the key 50 boom/bust line for the 22nd consecutive month but has effectively leveled out at the current levels for the past six months.
UK housing sector, a critical component of the country’s economy, appear to have stabilized with prices slowing rising over the past several months but activity remains well off the highs set in 2007. Record low interest rates and ultra easy monetary policy by the BOE have eased credit conditions, but organic demand remains elusive given lack of growth in the overall UK economy. UK is one of the few G-10 nations with a negative GDP in Q3 of 2009 and remains a laggard in growth relative to the rest of industrialized nations.
Despite the relatively neutral economic data, pound has continued to perform well tonight, rallying above the 1.6600 level once again as risk flows were mildly supportive. Some market analysts noted that cable may be benefiting month end corporate flows in EUR/GBP which are creating a temporary distortion in price sterling itelf. We continue to view the rally in cable with skepticism and believe the unit is vulnerable to a correction if tomorrow’s UK PMI services data disappoints.
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The FTSE sold off sharply on November 26th after the small panic out of Dubai. While we did not know what the catalst would be for the cycle turn date the turn played out a day early(The 27th of November was our short term cycle date for a down turn). Please understand while we do not expect it to bounce much higher from here it is possible, however, a move much more than the highs is not likely. Should the FTSE fall from here it will have support at the 5000 level.
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Charles Plosser, the president of the Philadelphia Federal Reserve Bank, became the first top central bank official to call for higher interest rates in this cycle. In a speech on Tuesday, Plosser said the Fed had to start raising interest rates sooner rather than later and had to begin withdrawing excess cash from the financial system. If the Fed does not act soon "the inflation rate is likely to rise to levels that most would consider unacceptable," he warned. Plosser will not be a voting member of the Fed interest-rate committee until 2011. Plosser was relatively upbeat about the economic outlook, calling for growth to average around a 3% annual rate over the next two years
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The markets gapped higher today on the back of yet another weak dollar day. The dollar is at its 52 week lows again and looking like it may wan to break lower. This tells us the markets will be up due to the inverse relationship that the dollar has with the markets. Why is there an inverse relationship? Basically it is the the reinflation rally syndrome. As the dollar falls, commodities rise to keep their par value. As they rise, stocks that are based off commodities like gold stocks, oil stocks and such, rise as well. In the S&P 500, these are approximately 20% of the index. Therefore they have a huge weight on the overall index. The reinflation rally is and can be utilized by those in government to prop the markets up and keep them up. Just think, the Federal Reserve just needs to keep pressure on the dollar each day by a slight amount and in theory this market will never fall. Granted, that is in theory and of course reality with be different at some point in time. The problem with a reinflation rally is this. When you hit the dollar it makes each Americans net worth less. Meaning, when the dollar falls by 10%, each citizen is now worth 10% less (buying power). In addition, commodity prices go higher which adds even more pressure to someones wallet as it works just like a tax. Enjoy the ride and thank the Federal Reserve and government. The key level we are hitting now intra day is the SPY $111.15 level. That is not a strong level and very likely will be broken. The big level above that is $111.50. Watch that closely!
Net-Net, the trifecta of the US data releases was on the positive side as US Nov manufacturing ISM fell to 53.6 from 55.7, employment index fell to 50.3 from 53.1, while new orders rose to 60.3 from 58.5. Oct pending home sales +3.7% after +6% in prior 2 months. US stocks still hold in +0.9% territory, while oil stands above $78 but initial pressure seen at $78.60s remains the next barrier before the key $79.50 trend line emerges. AUDJPY still unable to break above 80.30, but a close below 79.65 trend line support could call up fresh losses towards 79.10. EURUSD capped at $1.5090.
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The risk trade is on! - thanks to a sharp rise in pending home sales and moves by central banks in Asia. The extension of the housing tax credit has helped to boost pending home sales by 3.7 percent, the strongest increase on record. Given that the housing and manufacturing sectors were the hardest hit in the global slowdown, as long as both sectors continue to recover, risk appetite can be sustained. Manufacturing ISM fell short of expectations but so far, the dip has failed to take the steam out of risk rally. The stronger numbers could help the dollar recover modestly but we do not believe that they have enough punch to take the EUR/USD back below 1.50 today and will only prevent it from making a new yearly high.
In the month of November, manufacturing ISM fell from 55.7 to 53.6. This is the fourth consecutive month that ISM is in expansionary territory. Aside from new orders, exports and imports, the rest of the underlying components of ISM all declined. However it is important to realize that new orders and exports are direct beneficiaries of a weaker dollar which suggests that the depreciation in the greenback is holding up the U.S. economy. This is the single biggest reason why the market has downplayed the Federal Reserve and Treasury's calls for a stronger dollar, because traders know that at this point in the recovery, a weak dollar helps more than it hurts the economy. The only reason why they have made conflicting comments is to appease their trade partners.
However rather than sit idly and watch the dollar fall, the Japanese attempted to take measures into their owns hands - the only problem is that they fell short. The new Democratic Party held a special meeting on the economy last night and they had the opportunity to completely turn the Yen around. Unfortunately they did not decide to intervene in the foreign exchange market and sell the Japanese Yen and instead simply increased their Quantitative Easing Program by 10 trillion. This has halted the rise in the Yen but we believe that this will only be temporary. By not intervening last night, the Japanese government has signaled to the market that at 85, USD/JPY is a threat to the economy but does not create an emergency situation that would warrant the first intervention by the Ministry of Finance in 5 years and the first by the DPJ. Yet the bottom line is that the government increased stimulus which should help to spur the recovery. As for Reserve Bank of Australia, their decision to raise interest rates 3 months in a row is a clear vote of confidence on the economy and the reason why traders continue to buy the commodity currencies.
Looking ahead, the countdown begins for non-farm payrolls, which is due for release on Friday. The employment component of manufacturing ISM fell from 53.1 to 50.8, which is marginally above the 50 boom/bust line and suggests that the pace of improvement in manufacturing payrolls has slowed. Based upon the jobless claims figures, we expect non-farm payrolls to fall less in November than in October. Traders will be looking to the ADP and service sector ISM report for more confirmation over the next 48 hours. Expectations for a stronger NFP number could help to sustain the risk rally even though a push to new a yearly high in the EUR/USD may have to wait.
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The Reserve Bank of Australia produced an unprecedented third consecutive monthly rate hike of 25bp taking the benchmark rate to 3.75%, but the accompanying statement did not offer a clear timetable for further increases spurring some profit taking in the Aussie.
In the accompanying statement the RBA noted, “In Australia, the downturn was relatively mild, and measures of confidence and business conditions suggest that the economy is in a gradual recovery. The effects of the early stages of the fiscal stimulus on consumer demand are fading, but public infrastructure spending is starting to provide more impetus to demand. Prospects for ongoing expansion of private demand, including business investment, have been strengthening. There have been some early signs of an improvement in labor market conditions. The rate of unemployment is now likely to peak at a considerably lower level than earlier expected. “
The monetary officials however did not provide any clear guidance regarding further tightening in 2010, leading some market players to speculate that the RBA may pause until February before considering any additional rate hikes. An announcement by local lender Westpac to lift variable mortgage rates by 45 basis points was also seen as weighing on the market. Yesterday, Australian New home Sales declined by -6.0% versus -4.5% the month prior and we noted that the RBA hikes are clearly having a negative impact on the housing sector which could begin to weigh on consumer sentiment.
Attention will now turn to the Retail Sales number due tomorrow night at 1:30 GMT. The market is anticipating a rebound of 0.3% versus a decline of -0.2% the period prior, but if the data prints hotter than forecast it would serve as a strong testament to the fact that Australian consumer demand remains robust and can absorb additional tightening measures by the RBA.
The Aussie traded down to 9110 in the aftermath of the release in a classic buy the rumor sell the news dynamic, but if the fundamentals of the Australian economy continue to show steady expansion, the unit should resume its rally against the buck given the massive interest rate differentials between the two currencies. The Aussie is the only liquid high yielder amongst the G-20 currencies and as such it should continue to attract carry trade flows if the environment for risk remains supportive.
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Here is the daily. If we close below 38% fib then there is more weight to the down side. This also takes out the lows.Through 16395 there is strong resitance at 16270 which is clustered with the 50% fib level too. I will be looking for a short if we hold below this level. I will be looking on 4H and lower for more confirmation and entry.
GBP is the biggest loser in Monday trade, with falling UK lending prompting the damage. Lingering doubts over UK banks' exposure to the Dubai fallout remains a question mark. Dubai's statement that it will not guarantee Dubail World's $59 bln in debt was offset by positive comments from the major credit agencies. USDJPY remained confined at 87.00-85.80. Cable now capped at by new resistance at $1.6520. All eyes shall fall on the Aussie and the RBA decision due 3:30 am GMT. RBA preview coming up in next IMT.
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The full brunt of U.S. traders are back in their offices and judging from the price action in the currency and equity markets, they are not entirely convinced that Dubai's problems will end up troubling the world. Yes, Dubai is a major global player but the British have much more to worry about than the Americans. Of the UAE's total cross border banking exposure, European banks hold 72 percent and 41 percent of that is with the U.K. U.S. and Japanese exposure only amounts to 9 and 7 percent of the total flow. This explains why the British pound is the only high beta currency that is not rising against the U.S. dollar this morning. For the most part, it appears that currency and equity traders have shrugged off the news. Although we believe that an all out default of Dubai's sovereign debt is not an immediate risk and the situation is not nearly as grave as some people make it out to be, it is still unfolding. Fundamentals still support further dollar weakness but we caution traders against taking large positions.
Risk appetite is also benefiting from positive U.S. economic data. Chicago PMI rose to 56.1 from 54.2, the highest level since August 2008. Earlier this month, there was a bit of confusion about how the U.S. manufacturing sector is performing. Conditions deteriorated in the NY region but improved in Philadelphia. We now know that the sector continues to expand in the Chicago region which suggests that the national ISM manufacturing index may have also risen in the month of November. All but one of the underlying components (production) increased, with the employment component of Chicago PMI rising from 38.3 to 41.9.
Canada: Low Inflation and Strong Growth
Aside from the Chicago PMI report, one of the more important economic releases this morning were Canada's GDP and inflation reports. The Canadian economy grew 0.4 percent in the third quarter with a similar degree of growth in September. The Q2 data was also revised higher from an annualized rate of -3.4 to -3.2 percent. In other words, Canada, like many other countries around the world came out of recession in the third quarter. The latest industrial product and raw material price figures were mixed with the former falling 0.3 percent and the latter rising 2.5 percent. Relatively low inflation levels and positive growth reflects the improvements in the Canadian economy. However the Canadian dollar has struggled to rise since growth in Q3 fell short of the market's 1.0 percent forecast. There are no additional reports from Canada until Friday, when employment numbers and IVEY PMI are due for release.
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