Outlook:

We are in data-notice mode. After disappointing service sector PMI’s everywhere, the US reports its version today. We get the Markit final service and composite PMI, the ISM non-manufacturing index, factory orders, Jan durables (final), and the usual weekly jobless claims.

All of this should pale in comparison to tomorrow’s payrolls. As noted above, yesterday ADP forecast the private sector component of payrolls up 214,000 in Feb vs. earlier forecast of the forecast at 185,000. To be fair, Jan was revised to 193,000 from 205,000 initially reported. Market News writes that the ADP forecast was well-heeded in the fixed income market, hence the rising yields, but it didn’t hit the headlines in the financial press, so maybe the equity gang didn’t get the message.

The Market News median estimate for tomorrow’s payrolls number is 195,000, with average hourly earnings up 0.2% and the unemployment rate steady at 4.9%.Some big-name analysts have higher numbers, like High Frequency Economics (210,000) and BNP (215,000), which notes the ADP private sector number is a lousy forecaster of the actual.

As usual, we have to judge the payrolls number in the context of expectations. If the market expects a high-ish number like 210,000 but it comes in far below it, like 160,000, the dollar is sold off. If the number beats expectations, the dollar spikes higher. The problem lies in evaluating a jump in prices from a level that had already built in a good number. Sometimes profit-taking goes overboard and a good number results in too much “sell on the news.”

Depending on the details, like earnings and participation rate, initial responses can get more momentum or get reversed. It should go without saying by now that nobody should have a position going into the number tomorrow morning at 8:30 am ET. Even if you get the forecast exactly right, the market wants to jump right over your orders. It’s the only reliable fun day for the big players.

We think the forecasting has become a little better (which doesn’t make it good), and payrolls will be above 200,000. Longer run, that means the Fed might be on track to raise rates again in June. See the FT’s table from the CME of bets on the timing of the next hike. We used to have nobody seeing a rise beyond 1% by September and now we have a few lone souls out there.

Strategic Currency Briefing

On the larger world stage, we still have worries other than China. Brazil, for example. Analysts have been saying since before tapering began that normalization would hit the emerging markets the hardest, making their dollar-denominated borrowings more expensive to repay. Then the commodity price down-turn worsened conditions. The most important of the EMs is probably Brazil, which is managing itself into the abyss. The FT reports “Brazil suffered its steepest contraction in more than three decades in 2015, official data confirmed Thursday, as a perfect storm of falling global commodity prices, a corruption scandal at state-backed oil major Petrobras and a deepening political crisis brought the once-high flying economy crashing.

“Gross domestic product fell 1.4 per cent in the last three months of 2015 from the previous quarter, according to figures released by IBGE, the country’s statistics agency. The contraction was shallower than the 1.6 per cent forecast and comes on top of the 1.7 per cent drop recorded during the third quarter.
Overall, Brazil’s economy shrank 3.8 per cent in 2015, its worst annual performance since 1981 when the country suffered a 4.4 percent contraction.”

Maybe Brazil is the exception that proves the rule. Other big EM’s are not doing as badly, like Mexico, although are doing worse, like Venezuela. Whatever it turns out to be, Brazil’s failures are going to jump up and bite us on the rear end. We could get defaults, distress cries from the IMF Poobahs for emergency lending, and all the rest of it.

We like to think we won’t get contagion as we had in the Asian crisis in 1997-98, but does anyone know the aggregate lending to Brazil by French banks, or Japanese banks, or US banks? If there is a reason for risk aversion to have some bite, you don’t have to look further than Brazil.

US Politics: The latest move in the effort to unseat Trump as the leading Republican contender for the presidential nomination is a letter on a website reported by the FT. It is signed by 60 VIPs, including former state department and defense department officials. It says, in part, Trump is “fundamentally dishonest” and “unfit” to be president.

Trump’s views are “wildly inconsistent and unmoored in principle.” He “swings from isolationism to military adventurism within the space of one sentence.” The call for a trade war is disastrous and support for torture “inexcusable.” He looks like a racketeer trying to extort Mexico to pay for a wall and Japan to pay for military security.

One of the wilder statements is taken by the FT from the HBO Bill Maher “comedy” show—former CIA and NSA director Hayden said US military commanders might refuse to follow orders if a President Trump, as commander in chief, ordered the killing of terrorists’ families. Soldiers are not required to obey orders that are contrary to international law. That assumes they know what the international law is in the first place.

In other words, the party bigwigs and the Washington establishment are mad as hell and not going to take it anymore. Well, so are the voters, and the ones they are mad at are the party bigwigs and Washington establishment. The only hope is getting some admirals and generals out, in uniform, to rebut and refute Trump. The Trump voters have an outsized (and sentimental) commitment to men in uniform.

We have another debate coming up. At a guess, it will be watched by even more millions, including those hoping for a comeuppance.

CurrentSignalSignalSignal
CurrencySpotPositionStrengthDateRateGain/Loss
USD/JPY113.99SHORT USDWEAK02/04/16117.573.04%
GBP/USD1.4969SHORT GBPSTRONG02/17/161.4349-4.32%
EUR/USD1.0875SHORT EUROSTRONG02/23/161.10111.24%
EUR/JPY123.96SHORT EUROWEAK02/11/16126.191.77%
EUR/GBP0.7729LONG EUROSTRONG10/23/150.71947.44%
USD/CHF0.9973LONG USDWEAK03/01/161.0002-0.29%
USD/CAD1.3427SHORT USDWEAK02/01/161.40314.30%
AUD/USD0.7331LONG AUDSTRONG01/25/160.69805.03%
AUD/JPY83.57LONG AUDNEW*WEAK03/03/1683.570.00%
USD/MXN17.8488SHORT USDWEAK02/23/1616.12081.50%

This morning FX briefing is an information service, not a trading system. All trade recommendations are included in the afternoon report.

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