Early FX

May 9th, 2016 7:00 am | by John Jansen |

Via Kit Juckes at Socgen:


Friday’s US payroll data were a little soft but well within any reasonable person’s confidence interval. The long-term average monthly increase dipped from 206k to 205k. The unemployment rate stayed at 5%, but wage growth edged up to 2.5% y/y. The data confirm the steady growth of job creation. That’s not the US economy’s problem. The economy’s problems are productivity (or lack thereof) and the weakness of capital spending. You can argue that super-low rates have hindered investment while promoting debt-financed share buy-backs and tax-inspired corporate management. Whatever the cause, the situation isn’t changing.

Markets meanwhile, rely on this precarious combination of data – weak enough to keep the Fed in easy mode, but not so weak as to heighten fears of global economic slowdown. Worse, risk sentiment is increasingly sensitive to statistically irrelevant gyrations in the data. So, after her meal of tepid porridge, Goldilocks must negotiate a ricketty rope-bridge to escape furious bears, while small economic surprises threaten to tip her into the ravine below. It reminds me of an Indiana Jones film, and while I hope that it all ends well (it usually does, in films), I have my doubts. Friday’s data were just about within the range of outcomes that keeps markets balanced but if a mere 50k ‘miss’ is enough to make everyone nervous, it’s just a matter of time before we see a bigger shock and more volatility.

Markets need growth to stay on the straight and narrow


Whether this ends with strogner data and higher yields, or weak data and increased fears, the dollar will rally. Bears are treading an ever-narrower path and we want to go on slowly building dollar longs. We’re already short NZD/USD and GBP/USD and will look for opportunities. Mean while, if CFTC data are an indication of market positioning, they show a further increase in the net USD short, as longs increased in CAD and NZD, and shorts in EUR and MXN were cut further. Yen longs however, were cut back slightly as bulls finally reached satiation.

The big dollar position adjustment continues


[*] Oil picture even more blurred.

Oil prices are higher this morning, in reaction to concerns about the fire in Fort McMurray, and appointment of a new Oil Minister in Saudi Arabia. We’re much more comfortable with the idea of oil settling into a range (USD 40-50/bbl?) than with the notion of further gains near term, but as long as prices are still building a base that’s enough to give us a bullish bias of oil-sensitive currencies. Shorts in GBP/NOK and EUR/RUB are fine, the CAD is less cheerful.

[*] China, when not if

Chinese FX data posted a further modest gain in April, driven by valuation gains as the Euro rallied. Trade data posted sluggish import and export data but everyone’s eyes are drawn to the huge jump in imports from Hong Kong, that suggests on-going capital flight. As the dollar’s correction runs out of steam and valuations effects stop boosting FX reserves, so concern will increase again. Likewise, when the current bout of policy support for growth fades, concern about the gradual economic slowdown will return too. None of this is imminent, but it’s inevitable all the same.

China imports – capital flight continues


Ahead this week: We’ve started the week with strong (+1.9% m/m) German factory orders, though there will be more headlines written about a new deal for Greece as the Eurogroup meets. Turkish politics too, will be a topic of interest in Brussels. In the UK, the MPC meets (and does nothing) amid press reports of the Bank of England preparing contingency plans for a vote to leave the EU. Anything which increases talk that the MPC’s next move could be to cut rates will be sterling-negative and a slight fall in GBP shorts on the CFTC data opens the way for weakness. Meanwhile the US data calendar consists mostly of retail sales on Friday – in other words, not providing much guidance.

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