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EUR/USD: Fresh Lows on Feeble French Auction, US ADP Payrolls

Published 01/05/2012, 10:49 AM
Updated 03/19/2019, 04:00 AM
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The Euro sell-off deepened yet again today on a feeble French bond auction and on the need for Spanish banks to bolster their capital. Then a strong US ADP report had the pair trying the 1.2800 handle for the first time in 15 months.

EUR/USD fell to its lowest level since September of 2010, taking out the 1.2860 low from last January on continued heavy selling of the currency almost across the board. The French bond action came close to reaching its maximum target, as the country auctioned longer term debt (10-30 years). In the wake of the auction, yields remained relatively stable, but demand wasn’t overwhelming and everyone is fretting the issuance avalanche on the way in February and March across the EU.

Meanwhile, Spain’s government today said that banks needed to put aside another EUR 50 billion for loss provisions. This represents some four per cent of Spanish GDP and Spanish bank stocks took a hit on the day, while Spanish 10-year yields stretched another 18 bps or so wider versus German 10-year bunds. Italian spreads were also wider on the day.

Odds and ends
The Australian dollar has been rather weak since Asia saw a fairly weak session overnight and likely as well due to two bad days for copper prices. The gold price today failed to take out the 200-day moving average – a key level for the entire currency debasement and strong commodity story. The Australian trade balance was also a disappointment, coming in at a 9-month low.

The US ADP payroll report was out at a whopping +325k, the highest level in the 11-year history of the survey and far stronger than expectations for less than +200k. It’s perhaps worth pointing out that last December was also very strong relative to the months prior to and after that month, which was not evident in the Nonfarm payrolls report.

Oil prices are becoming a factor at these levels and will be even more so if we see anything like the recent rise continuing for another couple of weeks. The situation in Iran and the Persian/Arabian Gulf as Europe considers whether to join in sanctions against Iran. A closure of the Straits of Hormuz would be instantaneously catastrophic, even if many judge it very unlikely. There are also rather under-reported events in Iraq that are further cause for alarm on the geopolitical front. It’s interesting to note that CAD has responded to the risk complex and oil rally, while NOK is very weak due to collateral damage from the Euro weakness and perhaps also due to its newfound status as a safe haven. It will be interesting to see what happens to the likes of CAD/NOK and AUD/NOK (another new high today) if risk retreats soon. Stay tuned.

The SNB’s Hildebrand faces ongoing embarrassment due to trades his wife made on the Swiss franc that began just before EUR/CHF floor was declared last year. So far, this story hasn’t destabilized the franc and may have little market effect if Hildebrand manages to convince the world that he knew nothing of his wife’s activities. This is actually plausible as it’s hard to imagine the redoubtable Mr. Hildebrand wanting to take part in a trade that was so obviously ill-advised.

EUR/HUF topped out and then retreated considerably today as the latest vicious volatility in the forint has finally pushed Hungarian officials into discussing negotiation with the IMF without pre-conditions. The critical issue is a controversial new law passed last week that put the central bank’s independence into doubt. Nerves are high and failure of negotiations could lead to a real default - or does extend and pretend forever prevail?

Looking ahead
Up shortly, we have the US ISM non-manufacturing index for December, which, if the pattern in US data of late holds true, will be strong relative to expectations. While we celebrated a strong US employment report last month, it is perhaps worth pointing out that this survey and its employment component disappointed in November. The latter fell back below 50 for only the second time in the previous 15 months.

As for tomorrow’s US employment report, while we have seen declining weekly claims of late, we may not see the blowout reading like today’s ADP, meaning that almost any number not way above expectations (currently at +175k according to a Bloomberg survey) would be a disappointment. We also saw a near miraculous drop in the unemployment rate in November of -0.4% to 8.6%, a development that may not have continued in December – or if it does, could at least be partially due to the “wrong reason” that helped the unemployment rate so much lower in November: namely a drop in the labour participation rate.

Tomorrow also sees the release of the Canadian employment report for December. The trend there has been rather negative with the last two reports well below zero and payroll growth generally trending lower in previous months with one wild positive spike in September. The disappointing trend in employment numbers has come despite few signs of the Canadian consumer or housing market rolling over. As we discuss above, oil is a significant drive for CAD as well.

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