Euro Traders Listless Ahead of ECB Announcement
ADP Adds To NFP Forecasts
RBNZs Alan Bollard Cannot Rule Out Further Hikes
US Dollar
After yesterdays ISM-services was fully priced into the dollar-denominated majors, most hunkered down for the wait for Fridays NFPs. However, as is common in the FX market, the lack of big name economic indicators did not actually equate to a quiet greenback. Instead, the recently muted bulls took advantage of current market conditions to bid the dollar off of its recent record lows. This distance can be vital if NFPs delivers a shock on Friday. Given enough distance from big levels, the reaction to a terrible employment print would have some distance to travel before the key levels are reached; and, by then the bullish ranks could be spent. Speaking of the looming labor report, the ferocity of speculation usually associated with it continues to heat up. Though employment indicators in the previous weeks have led to steady downward revisions in the consensus forecast, nearly every US indicator this week has built the case for strong hiring trends in November. Starting with a slightly stronger employment component in the ISM services report and hearty drop in job cuts reported by the Challenger report; market participants received the most direct indicator yet. The ADP Employment gauge, measuring private sector hiring, reported 158,000 new positions filled last month. This was both greater than expected and the biggest addition in five months. On the other hand, the correlation between the ADP and NFP figures is dubious and the dollar selling that followed the report reveals the markets weariness.
Euro and Swiss Franc
Euro traders seemed listless ahead of tomorrows critical ECB Interest Rate Announcement, pushing the EURUSD just 30 points off of its open to close at 1.3285. Swiss Franc price movements were similar against its Eurozone counterpart, with the EURCHF remaining within its tightest single-day range in three weeks. The lack of significant economic data forced price moves off of order flows and triggered stops, with the USDCHF posting a strong reversal off of previous 18-month highs. Markets will subsequently wait for key fundamental reports through tomorrows Euro session. Due at 6:45 GMT, Swiss officials will likely report that Unemployment remained near multi-year lows through the month of December. Any surprises could certainly hurt recent CHF strength. The most significant of the news will of course be the later ECB announcement. Though a further 25 basis point is virtually a done deal, markets will scrutinize commentary to examine the likelihood of further hikes. With synthetic forward rates pricing in another 25 bp through the first quarter of 2007, risks could remain to the downside if ECB Governor Trichet does not reiterate the need for strong vigilance in counteracting strong inflation.
British Pound
The sterling fell for the second consecutive day, with weak Industrial and Manufacturing Production numbers hurting outlook on Europes second-largest economy. Predicted to gain a meager 0.1 percent on the month and 1.6 percent on the year, UK Industrial Production actually fell by 0.8 percent through October and only grew an annual 0.6 percent. The immediate drop in the GBPUSD did not translate into substantive moves in bond and interest rate futures markets, however, with UK Gilts staying barely changed through the European close. This in and of itself suggests that speculators seem little concerned that weak industrial figures will keep the Bank of England from raising rates by another quarter percentage point through early 2007. It will be interesting to watch reactions to tomorrow mornings BoE interest rate announcement, but the likelihood of no change and subsequently zero commentary may limit any significant price moves in GBP pairs. Traders will instead have to wait until the 20th, when the central bank will release the minutes from the current meeting.
Japanese Yen
Yen bulls lost ground for the first time in five days, with a broad US dollar recovery leaving the USDJPY nearly 40 points higher on the close. The fact that the move came on no new economic data leaves it vulnerable to upcoming releases, however, with tomorrow nights Japanese GDP report posing considerable event risks for Yen currency pairs. Recently hawkish rhetoric from government officials tells us that the Bank of Japan may opt to raise interest rates despite softer consumer spending figures, but any downgrades in national GDP growth would likely force policy members to strike a different tune. The Yen will subsequently depend on a steady final revision to headline growth to continue its recent appreciation against world currencies. Bond markets show that yield differentials continue to shrink, with the 10 Year Treasury-JGB spread now at 285 basis points?a fresh 13-month high. Unless we see a reversal in trend for yields, the US dollar will likely continue lower against its Japanese counterpart.
Commodity Currencies (CAD, AUD, NZD)
The last of the commodity bloc central banks to weigh in on monetary policy, the Reserve Bank of New Zealand group decided to follow trends and announced that interest rates would go unchanged from it current 7.25 percent. However, unlike the BoC and RBA, Governor Alan Bollard left the market with a genuinely hawkish outlook. Noting medium-term inflation pressures remain persistent, the central bank head said he could not rule out another rate hike that may be needed to dampen consumer spending and new momentum in housing. Across the Tasman Sea, the Australian dollar only modestly pressured by third quarter GDP printing at 2.2 percent, its most sluggish pace in three years. This may reveal the market was positioned for much worse given the nations worst drought in a century. Finally, Canadian data was making waves in the currency market with a building permits and Ivey PMI report. Leading Fridays housing starts indicator, permits for October grew 6.1 percent to the second highest level on the books. Considerable less rosy, the Ivey spending report was the closest to stalling its growth trend in eleven months as every component for the survey slipped.
