USD and JPY at pivot points as new month gets under way. US ADP employment number shows no let-up in US job market.

MAJOR HEADLINES – PREVIOUS SESSION

  • Australia Feb. Retail Sales out at -2.0% MoM vs. -0.5% expected
  • Australia Feb. Building Approvals rose 7.8% MoM and fell -25.5%YoY vs. +1.5%/-30% expected, respectively
  • Germany Feb. Retail Sales out at -0.2% MoM and -5.3% YoY vs. -0.6%/-1.3% expected, respectively
  • Sweden Mar. PMI Swedbank Survey out at 36.7 vs. 34.4 expected
  • Switzerland Mar. SVME PMI out at 32.6 vs. 33.0 expected
  • EuroZone Mar. Final PMI out at 33.9 vs. 34.0 originally
  • EuroZone Feb. Unemployment Rate rose to 8.5% vs. 8.3% expected and 8.3% in Jan.
  • US Mar. ADP Employment Change fell -742k vs. -663k expected

THEMES TO WATCH – UPCOMING SESSION

  • US Mar. ISM Manufacturing and Prices Paid (1400)
  • US Feb. Construction Spending (1400)
  • US Feb. Pending Home Sales (1400)
  • US Weekly Crude Oil and Product Inventories (1430)
  • US Fed's Pianalto to Speak (1700)
  • Australia Feb. Trade Balance (0030)

Market Comment:

The glass is apparently half full for AUD traders as overnight data showed a very ugly Retail Sales drop, but a sharp rebound in Building Approvals. AUD has been perhaps the strongest currency since equities decided to come back from the brink and it seems to offer a flipside to the JPY weakness. The AUDUSD pair is back close to the big 0.7000 level. A strong renewal in the uptrend is likely only in store if risk appetite continues to blossom in the short term and/or if the competitive devaluation theme is renewed with continued upmoves in gold and other commodities. Otherwise, the longer term range is likely to hold for now. Also keep in mind next Tuesday's RBA meeting, in which they are almost certain to cut rates 50 bps to 2.75% after passing on moving rates at their March meeting.

Both the USD and the JPY are at key inflection points as we head into tomorrow's G20, which the consensus is beginning to predict will be more of a fizzler than a fireworks generator. We're note so sure, not so much for the G20's potential to alter market fundamentals, but more because several markets seem to be poised on a knife's edge and because we have started a new financial year in Japan. We have noted that equities are poised in an either/or situation at the moment. As for the JPY crosses, the most obvious level to look at is the benchmark USDJPY and the 100.00 level, which looms as massively important in the bigger picture for whether the JPY weakening move will stop here in the near term. We have also noted that every year of the last five years has shown a strong reversal in USDJPY in April from the change in March. Looking at the USD index, the recent rally in the greenback took it to important resistance at the 55-day moving average and now the 21-day moving average comes in around the same level (about 86.20).

The US ADP employment change number showed a far worse than expected drop to -742k. If Friday's nonfarm payrolls change number matches that level, it will represent the largest drop since erratic data from 1949. The scary thing about the big cycle in employment changes is that unemployment tends to charge higher at a very fast rate until the rate suddenly begins to improve, rather than showing slow signs of easing. This is particularly the case in the early 1980's spike in unemployment, the last time the unemployment rate was this high. For indicators of when the galloping job losses will begin to reverse, we need to at least see a four or five weeks of initial jobless claims tapering off and then ISM surveys edging back above 50 before we begin to look for a coming trend reversal. It appears we may challenge the 10% unemployment level already this summer.

It was noted in the press yesterday that the contracting ISM number likely today (any number below 50 shows contraction) will show the most sustained recession in US manufacturing (at 17 months) since the Great Depression. Yesterday's terrible Chicago PMI number could mean that the ISM reading comes in below already very low expectations. We have recently discussed the unsustainability of ever-worsening survey numbers due to their comparative nature, and this and the next month are likely to show a bottom in what the great economist Shiller called the rate of the "worsening of the worsening". He used this phrase to describe the slackening pace of housing price declines.

The other key event tomorrow is of course the ECB meeting, in which Trichet and company are expected to cut rates 50 bps to 1.00%. The larger question beyond the rate cut is of course to what degree Trichet signals a deeper move into non-traditional monetary policies and joins the rest of the world's competitive devaluators just as the G20 is ironically coming out with a communique that condemns the practice. The pressure on the ECB is accelerating as the EuroZone contraction becomes more severe (witness the jump in Euro-wide unemployment to 8.5% in Feb. and the awful German Retail Sales results rolling in this morning) and on other festering issues we and others have discussed for a long time: the huge outstanding short-term corporate debt and the need to roll it in the coming 18+ months. Could the ECB move toward outright corporate bond purchases? This would be a EUR-negative development.

As the G20 meeting nears tomorrow, the CEE currencies are rallying strongly, indicating a hope that this meeting will offer a strong move to bail out these countries and their flailing currencies. We will certainly see a move in this direction tomorrow, and EM currencies are likely to be some of the most volatile as the market gauges the scale and viability of any strategy announced.