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99e82d3b-4110-4379-8f5b-11a0eb66741f

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Trichet rather hawkish relative to expectations

Thu, Nov 5 2009, 14:33 GMT
by John Hardy

Saxo Bank

G-20 meeting this weekend in Scotland. Ivey PMI to decide USDCAD's fate?

MAJOR HEADLINES – PREVIOUS SESSION

• New Zealand Q3 Unemployment Rate rose to 6.5% vs. 6.4% expected and 6.0% in Q2

• New Zealand Q3 Employment Change fell -0.8% vs. -0.3% expected and -0.4% in Q2

• Australia Sep. Trade Balance dropped to -1849M vs. -2150M expected and -1651M in Aug.

• Switzerland Oct. SECO Consumer Climate survey rose to -30 vs. -38 expected and -42 in Sep. 

• Switzerland Oct. CPI rose 0.6% MoM and fell -0.8% YoY vs. +0.7%/-0.7% expected, respectively 

• UK Sep. Industrial Production rose 1.6% MoM vs. 1.2% expected 

• UK Sep. Manufacturing Production rose 1.7% MoM vs. 1.0% expected 

• EuroZone Sep. Retail Sales fell -0.7% MoM vs. +0.2% expected

• UK Bank of England left rates unchanged at 0.50% as expected 

• UK Bank of England raised Asset Purchase target to 200B vs. 225B expected and 175B previously 

• EuroZone ECB left rates unchanged at 1.00% as expected 

• Canada Sep. Building Permits out at 1.6% MoM as expected 

• US Q3 Nonfarm Productivity rose 9.5% vs. 6.5% expected

• US Q3 Unit Labor Costs fell -5.2% vs. -4.2% expected 

• US Weekly Initial Jobless Claims fell to 512k vs. 522k expected and 532k last week 

• US Weekly Continuing Claims out at 5749k vs. 5750k expected and 5817 last week 

THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• Canada Oct. Ivey PMI (1500)

• US Oct. ICSC Chain Store Sales (1600) 

• Australia Oct. AiG Performance of Construction Index (2230)

• Australia RBA Quarterly Monetary Policy Statement (0030)

Market Comments:

Yesterday's post FOMC reaction shows that the market had already priced the outcome into the market, with the USD weakening sharply all day going into the announcement, meaning that the event itself became an anti-climax and a trigger for profit taking and consolidation. JPY crosses were overexuberant as well, it turns out, and corrected back sharply in Asia and Europe today after rates stabilized in the US on the dovish FOMC statement.

Bank of England less dovish than expected

Today, the Bank of England left rates unchanged as expected, but tinkered with the size of the asset purchase program, adding "only" GBP 25 billion to the QE measure rather than the expected GBP 50 billion. Just for perspective, relative to the size of the economy, this would be like the Fed announcing an extra USD 200 billion in QE. We're not talking about "chump change" here. Obviously, expanding QE measures shows that the BoE is still concerned about the prospects for the UK economy. The question is whether QE is doing anything to fix the UK economy, where asset prices are miraculously back on the rise, but real economic activity is still very sluggish. The smaller than expected expansion of the APP saw the pound sharply stronger in today's trade, with GBPUSD trading above 1.6600 for the first time since in almost two weeks. EURGBP was also sharply lower after the BoE announcement and is threatening the low of the recent cycle down around 0.8915. The next important data release from the BoE is next Wednesday's Quarterly Inflation Report. The BoE's statement noted that inflation is likely to increase from here (this is partially a result of the year-on-year comparisons becoming more reasonable as the commodity bubble popped last summer). There will be plenty of volatility on that release, depending on how the bank projects the threat of inflation.

G20 sneaking up on us.

With the focus on the onslaught of important economic data and central bank meetings this week, the upcoming G20 meeting this weekend had slipped off the radar screen. The only signals coming out of the various powers that be ahead of this meeting are that the "US...wants progress on a framework for [global} rebalancing", that the "rebalancing timeline is to be lengthy, with IMF playing a role" and that "Forex not on agenda but no surprise if it comes up". All of these points according to a Reuters article from late yesterday. In other words, there will be plenty of discussion, but little concrete action and the only headlines we are likely to get out of the meeting are along the lines of "G20 agrees there are still economic risks, to maintain stimulus" and "G20 agrees to work toward global rebalancing....". Watch out for the odd comment, however, from individual finance ministers, who may protest at the strength of their currencies. This is especially the case for Europe. A Brazilian newspaper also apparently reported that Brazil is trying to cook up a plan with Australia, New Zealand and South Africa to prevent overvaluation of their currencies versus the US dollar and Chinese Yuan.

ECB

The ECB kept rates unchanged at 1.00%, but Trichet was a bit more positive on the prospects for the EuroZone economy than other recent statements would have led the market to believe, so EUR is gaining some support as Trichet is out speaking. His initial words at the press conference describing a cautious optimistic view on conditions improving was watered down with the statement that the outlook is subject to high uncertainty. The Euro got a bit more reaction, however, when Trichet said that "not all liquidity will be needed in the future". This latter statement sent December 2010 Euribor down several ticks and Euro higher. Were it not for tomorrow's US employment report event risk, EURUSD would likely be trading much higher on this development alone. This is a more hawkish ECB stance than was anticipated coming into today's meeting.

Next Up: US employment report The next focus is obviously the US employment report out tomorrow. There is nothing to lead us to expect good news here. Yes, the magnitude of payroll losses could shrink a bit from the previous month in line with the fall in the ADP number, but jobless claims are still rolling in fast and furious relative to historic levels, today's good data point notwithstanding. Those weekly claims need to fall below perhaps 350k for several weeks before we might see a stable improvement in the very high unemployment rate, which is set to vault past 10.0% soon, perhaps hitting that mark tomorrow.

It was quite a blow to the employment outlook to see yesterday's pathetic reading on the ISM Non-manufacturing Employment component, which actually fell to a very weak 41.1 after 44.3 in September. More important for the movement in currencies tomorrow than the actual level of the numbers is whether the market decides to celebrate weak employment's implications for keeping rates low (and therefore keeping the USD carry trade fed asset bubble inflating) or whether the market ever decides that bad economic news is worth worrying about.

The USD looks weak again, and continues to follow the ups and downs in risk appetite, though the FOMC statement was dovish enough that it is tending even weaker. Whether EURUSD can maintain above 1.4850 for the short haul will be determined by the reaction to tomorrow's US employment report. Last month, the payrolls report marked a bottoming out of a run lower in EURUSD (and was also the bottom of a run lower in equities as the stock market decided to celebrate the poor employment showing with a strong rally the following week).

Chart: USDCAD

USDCAD looks interesting over the next couple of days. We have so far seen a basic retracement, with yesterday's close very near the 0.382 Fibo of the latest rally to 1.0870 . Today's Ivey PMI and tomorrow's combination of both the Canadian and US employment data for October are likely to tell us whether the lows are in for now, or whether we could see a test toward the lower 0.618 Fibo in the 1.0460 area in the event of a further rally in risk appetite and a weaker USD. The sequence that put USDCAD back above 1.0590 after a try down to 1.0200 suggests that we should be looking for confirmation soon that a structural low (1.0200) is in place.

Published on  Thu, Nov 5 2009, 14:38 GMT