Asia extends the weak dollar trend, but only just. US/Canada holidays likely to curb enthusiasm


MAJOR HEADLINES – PREVIOUS SESSION

  • US Aug. Non-farm Payrolls out at -216k vs. -230k expected and revised -276k prior

  • US Aug. Unemployment Rate out at 9.7% vs. 9.5% expected and 9.4% prior

  • US Aug. Avg. Hourly Earnings out at +0.3% m/m, +2.6% y/y, vs. 0.1%/2.2% expected and 0.3%/2.7% resp. prior

  • CA Ivey Aug. PMI out at 55.7 vs. 54.5 expected and 51.8 prior

  • NZ Aug. QV House prices out at -2.8% y/y vs. -5.0% prior

  • AU Aug. AiG Performance of Construction out at 42.4 vs. 39.5 prior

  • JP Aug. Official Reserve Assets out at $1,042.3b vs. 1,022.7b prior

  • AU ANZ Aug. Job Advertisements out at 4.1% vs. -1.7% prior


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • Sweden Budget Balance (0730)

  • Norway Industrial/Manufacturing Production (0800)

  • EU Sentix Investor Confidence (0830)

  • GE Factory Orders (1000)

  • CA Market Holiday

  • US Market Holiday

Market Comments:

A mixed reading of the US labour data on Friday ensured a volatile time just after the release. While the headline non-farm payroll number was better than expected at -216k versus -230k, a 49k downward revision to previous data clouded the issue and the unemployment rate leapt to 9.7% from 9.4% previously, much higher than the 9.5% forecast. The reaction in currency and equity markets suggests that the market’s focus was mainly on the headline non-farm payroll data and this was overall seen as a positive report, contrary to our interpretation, though it could be argued that the aggressive dollar selling was into thinning markets and an effort by UK players to squeeze holiday-mode US players. Nevertheless, what activity there was in Asia looked to extend the closing trend, with equity markets pushing higher and the dollar under pressure.

The weekend’s G-20 meeting of central bankers and finance ministers produced little in the way of market-moving inputs. G20 minister agreed to keep their foot on the accelerator for the time being and not look to reverse their expansionary fiscal, monetary and financial measures just yet. However, they did recognize the need to work on preparing a “transparent and credible process” for withdrawing the stimulus once signs of a more sustained recovery were apparent. The whole weekend was summed up by “Financial markets are stabilizing and the global economy is improving, but we remain cautious about the outlook for growth and jobs”. There was not specific comment about currencies but the financial sector came under scrutiny with recommendations for banks to raise much more capital once the financial crisis had passed. Bankers’ remuneration was under the spotlight as well, but the statement fell short of German and French-led calls for direct caps on bankers bonuses.

Currency activity in Asia was muted, with most pairs opening where NY left off. The downward bias for the dollar was extended to a marginal degree though some pairs appeared to be heavy by early-morning. The GBPUSD rally stalled ahead of 1.6420 as the market took note of an article in the UK Guardian highlighting that the British Chamber of Commerce is urging the BOE to cut rates to zero at the upcoming MPC meeting on Thursday, citing serious blockages in bank lending which is starving UK businesses of cash and risking the tentative signs of economic recovery falling into relapse.

The second-tier Australian data that was released this morning was generally on the positive side: The AiG performance of construction rose to 42.4 from 39.5 while, perhaps more importantly, the ANZ job advertisements for August showed its first positive figure in 16 months. Given that the market’s attention will be rooted on Thursday’s unemployment report (the only thorn in an otherwise more-robust recovery), hopes will likely be lifted that the pace of decline in employment will not be as severe as previously thought. Latest surveys show the market is looking for 12,500 jobs to be lost, pushing unemployment slightly higher to 5.9% in August from June and July’s 5.8%.

Central bank reserve holdings were also in the news, firstly as Japan’s data release showed an increase in reserves to $1,042.34 bln, of which those held in foreign currency-denominated securities rose to $928.7 bln from $921.29 bln and holdings of SDRs jumped to $18.46 bln from $2.97 bln. While the DPJ’s recent election victory is not expected to result in any change in Japan’s FX reserve policy near-term, pre-election rhetoric suggests there may be a gradual favouring of a stronger JPY and a potential diversification of USD assets.

The theme of diversification also featured in a report from Ambrose Evans-Pritchard citing a top member of the Communist Party. It reports that China is dismayed by the US Fed’s policy of printing money and warned that, if there is no change as soon as positive economic growth is seen, it may compel China to redesign its foreign reserve policy. Cheng Siwei, former vice-chairman of the Standing Committee admitted that gold was definitely an alternative, but caution was needed in its execution so as not to stimulate the markets. This could be interpreted that buying by China was behind the recent surge in gold and may put a floor under any kind of decent dip.

The US and Canada holiday will likely curtail enthusiasm to push rates past current parameters. Data releases limited to Sweden budget balance, Norway industrial/manufacturing production, EU Sentix investor confidence and German factory orders.