Asia prefers to book profits after the dollar's recent run-up; conservative or contrarian?


MAJOR HEADLINES – PREVIOUS SESSION

  • US Q4 Final Productivity at -0.4% vs. +1.0% originally

  • US Final Unit Labour Costs at +5.7% vs. +3.8% originally

  • US weekly Initial Jobless claims at 639k vs. 650k expected and revised 670k prior

  • Canada Ivey PMI at 45.2 vs. 37.8 expected and 36.1 prior

  • US Jan. Factory Orders at -1.9% vs. -3.5% expected and revised -4.9% prior

  • US Q4 Mortgage Delinquencies at 7.88% vs. 6.99%

  • AU AIG Feb Construction Performance Index at 29.5 vs. 34.1 prior

  • JP Official reserve assets at $1009.4b end-Feb. vs. $1011.0b end-Jan.


THEMES TO WATCH – UPCOMING SESSION

  • UK PPI Input/Output (0930)

  • US Non-farm Payrolls (1330)

  • US Unemployment Rate (1330)

  • US Average Hourly Earnings (1330)

  • US Consumer Credit (2000)

Market Comment:

So, after yesterday’s business we have two more interest rates closer to zero, another central bank confirmed walking down the quantitative easing path…. and equity markets were 4% lower!

The fragile nature of the positive rally on increased China stimulus measures was confirmed when the talk proved unfounded and Wall St continued its slide down to multi-year lows. The financial sector was again in the spotlight, with concerns about ratings downgrades to the likes of JP Morgan, Wells Fargo and BOA adding pressure to the sector. AIG was again under a cloud when senior members of the US Senate’s powerful banking committee rebuked the Fed for its handling of the AIG bailout and threatened to block further requests for aid unless it could provide more detail on how the $163 bln injected into the group so far had been spent.

The decisions from both the BOE and ECB were both broadly in line with markets expectations and hopes. The details in the BOE quantitative easing gave markets something to ponder. The amount and timing of assets purchases was disclosed - GBP75 bln worth of medium and long-term Gilts and some private assets over the next 3 months. The BOE opined that the facility may have to be upped to GBP150 bln to stabilize markets.

The decision from the ECB was less involved with a “simple” 50bp cut announced though for once there was a hint that further cuts could be made down the road.
Markets were happy that the ECB had finally (belatedly) realized how serious the economic situation had become with its downward projections to growth for 2009 and 2010.

For today, markets eyes will be resolutely focused on the Feb. non-farm payroll numbers, and another dire reading is what the market expects. Latest polls suggest a number around the 650k mark with sentiment favouring an even bigger number closer to 700k. Any number of this magnitude would see an extension of the risk aversion theme, weaker stocks and well-bid dollar. What is the risk of a surprise? A number of “only” 600k? Slim, by anecdotal evidence, but it has been mentioned that the employment component of the recent ISM non-manufacturing survey for February released on Wednesday actually rebounded and some are reading more positive sentiments from this. Still, any USD collapse would be seen as temporary in nature amid the broader theme of a deteriorating global economy.

Asian FX markets were relatively quiet (the lull before the storm?) with position adjustments ahead on the non-farm payroll numbers favouring a slightly softer dollar. Nevertheless, the follow-through selling on Asian bourses after Wall St’s crumble kept the risk-aversion play alive and kept dollar losses at a minimum (ICE USD Index down 0.28% at press time). Europe is likely to adopt the same wait-and-see attitude before the data. Releases prior to the US non-farm payrolls are unlikely to solicit much attention, with UK PPI input and output numbers the only meaningful data on tap.