Forex Exchange Morning Report

Market wrap

 

Markets failed to fire despite a decent US payrolls report. Possible explanations for that include a whisper number which matched the outcome, less impressive results when adjusted for online holiday shopping, and entrenched concerns regarding Europe's economic prospects this year. The S&P500 closed down 0.3% after some volatility immediately after the payrolls release. Hungary was downgraded to BB+ (junk) by Fitch, matching Moody's and Standard and Poor's, although European sovereign bond markets recorded only moderate and mixed changes. Commodities were also contained, the CRB index up 0.3%. US 10yr treasury yields closed 4bp lower at 1.96% after spiking to 2.04% immediately post-payrolls, There was ample dovish commentary from Fed members Rosengren, Raskin, Duke, and Dudley, much of it calling for more support for the US housing market.

The US dollar index made a 12-month high of 81.4 following the payrolls report. EUR fell from the early London 1.3813 to 1.2698 following the payrolls report and then got stuck around 1.2720. It traded down to 1.2670 at the NZ open this morning. USD/JPY spiked to 77.34 early NY but then weakened to 76.96. AUD spiked to 1.0273 after payrolls but quickly slumped to 1.0202 and closed at 1.0228. It has traded down to 1.0185 this morning. NZD similarly spiked to 0.7838 and fell to 0.7787 where it trades this morning. AUD/NZD drifted lower from 1.3130 to 1.3080.

Economic wrap

 

US non-farm payrolls rose 200k in Dec, although there was an 8k downward revision to the first two months of Q4. That took the monthly average gain in Q4 to 137k, softer than Q3's 147k but still a little better than the 131k average through H1 2011. The detail in the report was mostly positive. Every industry sector recorded jobs growth, including construction after two monthly declines; the exceptions were government (due to the ongoing job shedding at the state/local level) and temps (maybe not a bad thing that fulltime permanent roles seem to be replacing temp workers). Hourly earnings rose 0.2% and hours worked a solid 0.5% (both after weak Nov outcomes), implying decent household income growth late in 2011. Revisions to the household survey mean the jobless rate at 8.5% has been trending down since mid year and is approaching a threeyear low. That survey now shows employment up for six months running, the longest stretch of unbroken gains in five years. All up, a decent report that paints a picture of modest but steady jobs growth that surprisingly has been sufficient to pull down unemployment somewhat.

Fedspeak: NY Fed president Bill Dudley called on the government to do more to support the housing market and said the Fed may yet need to ease monetary policy further “to improve the economic outlook and make monetary accommodation more eff ective”.

Canadian jobs rose 18k in Dec, after falling 73k in the previous two months, and the jobless rate rose for the third month running to 7.5%. In H1 2011 employment growth averaged 32k per month, but it virtually stalled at 1k per month in the second half of the year. The December detail showed full-time jobs down 26k off set by 43k new part-timers.

European business surveys mixed. The business climate index improved from –42 to –31 in Dec, its first rise in ten months, but the EU Commission's index of economic confidence posted its tenth straight decline, slipping from 93.8 to 93.3. In 2008 when these indices were at these levels the Euroland economy was already in recession, subsequent data showed.

Euroland retail sales down 0.8% in Nov. With downside revisions, the recent retail story is even bleaker than we thought; the annual decline in retail volumes is now 2.5% yr, the steepest decline since September 2009 and weaker than at any point in 2008 when the economy slid into deep recession. Euroland unemployment held steady at 10.3% in Nov, with a lower German rate off setting higher French, Spanish and Italian joblessness.

German factory orders down 4.8% in Nov. This reversed October's 5% rise and followed an 8% decline through Q3. The Nov detail showed foreign orders down almost 8% and a 1% fall in domestic orders.
UK house prices down 0.9% in Dec according to the Halifax. That's four declines in the last five months of 2011 for an annual pace of decline of –1.3% yr.

Market outlook

 

AUD/USD and NZD/USD outlook next 24 hours: There is the Australian retail sales report to watch today. NZ's trade balance is also out but usually has little market impact. AUD should be capped by 1.0390 during the next few days, 1.0045 the next downside target if 1.0200 gives way. NZD should similarly be capped by 0.7910 and should test 0.7655 if 0.7790 gives way.