USD selling might been seen in anticipation of a soft NFP print

Outlook:

The US news of note is auto sales, but it has been a horrendous winter. We’d like to see auto shop repair sales.

The FX market is returning to a data-dependency that was missing for a while. We are reminded that data must always be viewed in context. Case in point: Japanese wages rose 0.8% m/m and 1.3% y/y, a serious improvement and in keeping with Abe chiding companies to raise wages. But on an inflation adjusted basis, wages are down 1.5% y/y for the 19th month of decline. So which is it—a nice gain and success for government policy, or doom-and-gloom because of the inflation-adjustment? You can’t look to the yen for an answer, because the dollar/yen fell, meaning the yen rose, although most analysts attribute that to Honda’s remarks about over-depreciation and nothing to do with wages at all. If we were looking at inflation-adjusted wages alone, sans Honda, we’d buy dollar/yen on the expec-tation of further government action to boost wages, including a quid-pro-quo targeted stimulus. But Honda took that off the table, or wants us to think so. This is trickery and currency manipulation, and nothing to do with proper economic analysis.

We have something similar in the AUD. Everybody and his brothers expects rate cuts in Q2 now that March isn’t delivering a cut. Even Stevens is leaving the door open. But the AUD rallied in knee-jerk fashion and the RBA escapes the charge of currency manipulation even though the pending rate cuts will certainly have the intended effect of pouring cold water on the AUD, whatever China or commodity prices are doing. Heaven only knows what tricks Poloz has in store for us after the obvious trickery of the “insurance policy” comment. The BoC meets tomorrow (not today, as we reported yesterday).

These shenanigans remind us to be careful when we get the ADP forecast of private sector job growth today and the official nonfarm payrolls on Friday. What, exactly, is the context? Market News has a consensus forecast for NFP from around the market at about 250,000 (range 225,000 to 275,000). Okay, so we accept a drop in construction and employment in other measures but still expect good jobs in the NFP? That would be unrealistic. Feb weather was horrendous everywhere and the government has proven itself not very good at seasonal adjustment—we have had aberrations (and revisions) galore in recent months. So far the revisions have all been upward but Jan-Feb this year could see downward revisions. A new spate of fear over the trajectory of recovery could all too easily alter expectations of the Fed removing “patient” from the March statement.

If “patient” is not removed, you can kiss the June rate hike goodbye. To be fair, the Fed looks at more than one data-point. But the Fed’s expectations of inflation recovery are tied directly to job growth in a near-Phillips curve embrace. Besides, the rise in the savings rate to 5.5% suggests households do not fear inflation. If they did, they would be out spending their heads off, as usual.

We expect nerves to fray as Friday approaches. We could see some dollar-selling in anticipation of a bad number—although historically, we get a rising dollar on the Wednesday ahead of payrolls.

This week—until Friday’s payrolls—the focus has to be on the ECB pending QE. We wrote last week that nobody in his right mind will keep cash in negative yields unless they expect even deeper negatives or they expect a gain in the currency to offset by more. The winner in a QE environment is equities, as we saw in the US. The same thing is happening in Europe—the WSJ reports Markit data showing the flow into ETFs with eurozone exposure are $19.3 billion so far this year. This follows two quarters of outflows.

The WSJ also works over the “shortage” of eligible paper for the ECB is use in QE. ECB VP Constancio said the pool is deep and liquid—and €4 trillion. He expects no problem finding paper. But the WSJ notes the ECB plans to buy “€215 billion of German government bonds between this March and September 2016—26 times more than the amount the German government bond market is predicted to grow over the same period, Morgan Stanley says.”

Besides, the €1.1 trillion German debt market is held by central banks, banks and insurance companies. “Banks and insurance companies favor these bonds because they help them meet regulatory capital requirements, while central banks also tend to hold bunds and other top-rated government bonds when building their foreign-exchange reserves.” They may be required to hold these bonds and reluctant to fork them over. One analyst foresees the 10-year Bund negative by year-end.

So we have strong countervailing currents. The dollar rally is vulnerable to a bum payrolls report but at the same time, the euro is vulnerable to QE, including the issue of what the ECB is going to buy and how much and when. We hope to hear details on Thursday but may not. Is there a catalyst in here somewhere? Clear thinking is in short supply. That leaves the chart. We need to see the euro fall under the previous intermediate low at 1.1097 from Jan 25. If we don’t get it and PDQ, we probably need to imagine a bounce.