Euro Falls

Unhappy New Year for the Euro

The euro slid to a four month low against both the dollar and the yen over the weekend, trading well below the 1.30 handle against the Greenback as traders worried about government bond auctions scheduled for this week. Various stress barometers in the Eurozone spiked over the last week, with yields on Portuguese and Spanish debt escalating sharply while credit default swaps on Western European debt surged. Portugal will offer bonds for sale on Wednesday, with Spain and Italy to follow on Thursday. With $43 billion in relatively risky instruments for sale, markets are expressing concerns that low demand at these auctions could lead to a further rise in borrowing costs, potentially causing another debt crisis in the common currency area.
Unless a fundamental change occurs, the year ahead is strewn with potential crisis triggers. Sovereign issuers across the European Union will be forced to roll over an unprecedented amount of debt in the face of declining creditworthiness, lowered demand and rising inflation expectations. At the same time, the political union is facing entrenched skepticism about its cohesiveness as growth rates among member countries diverge dramatically. Euro bulls may be out to pasture for some time yet.
The British pound rose to a four month high against the euro while declining slightly against the dollar as investors bet that the Bank of England would begin tightening monetary policy long before the European Central Bank. Economic growth appears to be accelerating and inflation is running close to 3.5%, well above the central bank's 2% target. Although much of this inflation has been generated by taxation increases and commodity price rallies, traders have begun pricing in a benchmark lending rate hike by the third quarter of this year.
US Economy Improves, Dollar Surges
Friday's Non-Farm Payroll report saw a 103,000 rise in the number of new positions, and a revised increase of 71,000 for the previous month. The unemployment rate ticked down to 9.4% from 9.8%.
Market expectations had coalesced around the 150,000 mark, meaning that many traders were disappointed by the headline number. However, the gain was the third in as many months, leading markets to believe that the recovery is stable and beginning to accelerate.
The US economy continues to struggle as housing market weakness, ongoing deleveraging and low consumption weigh on activity. Employment is growing, but not quickly enough to keep pace with population growth. Full employment remains a distant prospect.
However, in currency markets everything is relative.
In the year's first week of trading, the US dollar saw the largest five day gain since last summer as traders weighed the alternatives and found them lacking. Given the parlous state of credit markets in the European Union, weak growth in Japan, and rising concern about emerging market risks, the Greenback is seeing a boost from domestically driven optimism in addition to a flight to safety response.
Looking forward, Friday's release of December retail sales numbers by the US Commerce Department will be very significant for markets. This will be another consumer sentiment barometer, with large implications for the US economy as well as exporting nations such as Canada. As with last Friday's employment report, any disconnect between expectations and reality will provide fuel for volatility.
CAD and MXN Gain on Economic Optimism
Strengthening in the American economy is tremendously positive for Canada and Mexico, both of which rely on US markets for much of their export revenues. The two currencies outperformed over the last week, moving up against most of the majors, largely in sync with the US dollar. For Canada in particular, an improvement in US demand could support the manufacturing industry and would potentially help to offset the negative impact being delivered by the strong Loonie.
Oil prices are up this morning to $88.85 a barrel after an Alaskan pipeline that carries almost 15% of US was shut following a leak. The impact on the Canadian dollar has been muted thus far, as traders estimate a relatively quick return to production. Traders seem to have lost some of their appetite for the fuel, trimming long positions last week and keeping futures well contained.
The Canadian dollar is locked into an unbelievably tight trading range against the US dollar, moving fewer than 100 basis points a day (on average) over the last two months. Foreign exchange traders miss the excitement, truth be told, but for corporate hedgers, the lack of volatility is a welcome respite from the wide swings seen over the last two years.
However, a note of caution is called for. Just as winter conditions inevitably follow the Canadian summer, volatility will eventually return. Just as many drivers enter each winter unprepared, many organizations will be unprepared when exchange rates move sharply once more. Consequently, this is one of the best possible times to open internal discussions about currency risk management. Implementing an effective currency trading framework now will prove invaluable when the roads become slippery once again.
Have a great week!

Payroll Figures Friday, Market Steady at this point.

Markets Mixed Overnight

Equity markets were mixed overnight in Asia, though Europe has been powering ahead towards the close with gains nearing 1% across the board.  The Nikkei in Tokyo hit an 8-month high with a 1.4% gain on improving local risk appetite that has been seeing capital flow into the market and the currency for a time period that is quickly approaching three quarters.  Bond yields in Europe, the UK and Japan all advanced while US yields once again retraced overnight, underscoring the momentum in currency markets that saw the USD yield territory to most of the majors.  At the same time, gold is suffering its fourth consecutive day of declines to now trade at $1,365.

The Canadian dollar was one of the big winners overnight, not so much on the USD but the crosses as the currency that has been lagging the broader market for months now appears to be playing catch-up given the fact that the Loonie has finally cracked and held the psychological resistance level at parity.  That said, while the CAD was well supported overnight, it is coming off of its highs this morning on the release of a much softer than expected Purchasing Manager’s Index.  Though the reading declined from November’s 53.3 result, purchasing activity still held the line at 50.0, which is the dividing line between expansion and contraction.
News and Notes From Around the Globe
The euro continued to trade heavily last night, briefly breaking through significant support at the 1.31 level on mixed local data that was on balance negative for the currency.  Euro Zone consumer confidence for December plummeted rather abruptly while retail sales figures also disappointed in falling 0.8% in the month of November alone.  German factory orders for the month of November came in much stronger than expected however, likely heading off a rout of the common currency on the day.  As might be expected, it appears as though the continent’s economic data is souring in line with the ongoing public debt challenges that are being faced across the region.  That said, there was a story today in a major Spanish newspaper that claimed that the Chinese were interested in making a major purchase of Spanish government paper – a story that is helping the currency to find a bid with some renewed hope that Spain will not suffer the same fate as Greece and Ireland.  At the same time, it must be noted that the spread between 10-year Portuguese and German government bonds widened another 8 basis points overnight, signaling the fact that markets aren’t quite as enamored with Spain’s smaller neighbor.

The pound sterling traded more erratically than most overnight, with a nearly 1 pence swing in a short space of time on largely negative local data.  Fourth quarter mortgage demand in the UK fell through the floor with an outsized decline in the final three months of the year while the UK services PMI declined unexpectedly for the first time since April 2009 in missing the market’s consensus estimate of 52.8 with a reading of 49.7 (a figure below 50 indicates a decline in activity, over 50 marks an expansion).  That said, increasing yields in both the Euro Zone and UK likely delivered support to both currencies that were otherwise in a downward spiral.

Everyone’s favorite flight to safety currency, the Swiss franc, took it on the chin overnight as market risk sentiment firmed despite the fact that interest rate expectations in the country took a turn lower.  Swiss CPI came in firmed than expected with a 0.2% increase over November, but the annual figure still came in at a rather anemic 0.5% year over year.

Elsewhere, Aussie building approvals came in lower than expected for the third time in the last four months, leading to further declines in the currency.  In Brazil, the central bank announced measures aimed at increasing the ratio of reserves that trading houses must hold to backstop their FX trading positions.
Jobs Day Tomorrow
Traders in both Canada and the US will see employment data tomorrow and most are likely to maintain or even trim their positions ahead of the release of those figures.  In this market environment, the focus of the market has been overwhelmingly focused on employment data as the leading, if not only, market indicator that matters in terms of predicting the future health of the economy.  For what it is worth, initial jobless claims that are released for the US market every Thursday have been on a downtrend since late October, building the market’s expectations of a positive reading out of the US on Friday.  That being said, both the market’s whisper number and consensus view have been heading northward, with the market now expecting a reading close to 160k+.