USD up on good employment data, CAD down on bad employment data; China inflation

Rates as of 06:00 GMT

Market Recap

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Well! It’s a rare day when USD is the top performer. No need to dig deeply to find out why — Friday’s nonfarm payrolls (NFP) were exceptional. Not only was the rise of 266k well above the consensus estimate (180k), it was even above the highest estimate (237k) in Bloomberg’s poll of 78 economists. Moreover, the previous two months were revised up. The 54k gain in manufacturing payrolls was the largest in over 20 years, while the unemployment rate fell back to a half-century low of 3.5%. On top of which, average hourly earnings growth also beat estimates, while the previous month was revised up too. PLUS, the U of M sentiment indices also surprised to the upside. So much for the recession! As long as more people are working and getting paid more, consumer demand is likely to hold up – that should keep the US economy going and reduce the likelihood of the Fed cutting rates again. USD POSITIVE

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On the other hand, CAD was the big loser after Canada’s employment data showed an unexpected fall in employment (-71.2 vs +10k expected, with the unemployment rate unexpectedly jumping to 5.9% from 5.5%. Bad! I think though we could get a rebound in CAD as oil prices climb and today’s Canadian housing starts show decent activity (see below).

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Separately, Bank of Canada Gov. Poloz announced that he would step down at the end of his term in June next year.

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JPY was stronger this morning. I’d like to say it was due to the better-than-expected final revision to 3Q GDP, which was revised up sharply to +1.8% qoq SAAR from +0.2% (+0.6% expected). However, in fact there was only a small (10 sen) move at that time. Basically USD/JPY went shooting up when the NFP figure came out, but gradually fell back afterwards. It’s currently trading just a bit above where it was when the NFP figure came out.

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I was surprised to see JPY up strongly but gold and silver down so much. However, when I looked at it, I found that this isn’t such a rare event. Using AUD/JPY as a “risk on, risk off” proxy, you can see that while gold and the currency market do tend to move together, there are still plenty of times when they don’t.

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There were also more contradictory statements about trade that I won’t go into. It looks to me like the reason the markets are confused about what’s going on with trade is that the administration is confused, or more accurately, no one knows for sure, neither in the US administration nor the Chinese side.

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Oil was up after Saudi Arabia announced it would cut its output by even more than they had agreed to in negotiations. The cuts in OPEC and non-OPEC output decided at Friday’s meeting brought the group’s total reduction in output to 2.1mn barrels a day (b/d), or more than 2% of total world demand, from some 1.18mn b/d previously. Given the unusually cold winter we’re already seeing in parts of the US, I think oil could continue to move higher for some time.

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Brexit update:  As we enter the last few days before the UK election, there was apparently a poll – I couldn’t find it – that implied Johnson’s likely majority has fallen in half over the last two weeks to around 40 from 82. Still, he only needs a majority of one, so 40 is just as good as 82. A lot of people are spending a lot of time and energy figuring out how to vote tactically – that is, even if you support the Liberal Democrats, maybe you don’t want the Conservatives to win, so you vote Labour in your district just to deny the Conservatives a majority in Parliament. Given Britain’s first-past-the-post system, where you only need a plurality to win in your district, this kind of thinking is going to be crucial.

The most important constituency for tactical voting is of course Boorish Johnson’s own constituency, Uxbridge and Ruislip – a commuter town on the outskirts of London. The PM is considered safe, but apparently the Liberal Democrats aren’t campaigning any more there so that the Labour candidate – 25-year-old Ali Milani — can have the best-possible chance of winning. On the one hand, no Labour candidate has ever won in this constituency, where 57% of people voted leave in 2016 (Milani is a strong “Remain” supporter). But Johnson won the seat in 2017 by just over 5,000 votes, about half of the winning margin he got in 2015 and the smallest lead of any incumbent PM since 1924. It would take a swing of just 5% of voters to vote him out. YouGov gives Johnson 50% of the vote vs 37% for Milani, but the estimate for Johnson ranges from 43%-57%, while for Milani it’s 31%-44%, so a win for Milani is within the margin of error.

Milani, an immigrant and the child of immigrants, grew up in government housing. The contrast between him and Eton- and Oxford-educated Johnson, couldn’t be sharper. He’s running on purely local issues, trying to present Johnson as someone who hasn’t done enough for his constituents. One wild card: Brunel University, located in the district, is Milani’s alma mater and has nearly 10,000 students who are potential voters. Students have the option of voting in their home constituency or registering to vote at university.

This race opens an interesting question: what happens if the Conservatives win a majority, but Johnson loses his seat? This has never happened in Britain before. There doesn’t seem to be any legal requirement that the PM also be an MP, although this has always been the case since 1902. (Before then, some PMs were members of the House of Lords.)

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Commitments of Traders (CoT) Report

The CoT report this week was a big “risk on” vote.

Specs cut their NZD shorts by a quarter after the Reserve Bank of New Zealand (RBNZ) shifted to “wait and see.” Nonetheless, specs remain extremely short relative to where they have been in the past, suggesting that there may well be more short-covering to come. Specs also reduced their AUD shorts as the Reserve Bank of Australia made it clear that negative interest rates were off the menu.

On the other hand, they increased their JPY shorts significantly and CHF shorts a bit less.

Yet at the same time they also increased their gold longs, which is another kind of “risk off” trade. I’m not sure what to make of this then, especially as they cut their silver longs. But the two positionings move together only 68% of the time, so it’s not that unusual.

They increased CAD longs. Those positions still have a long way to go before becoming excessive, though.

Specs cut their oil shorts ahead of the OPEC meeting.

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Today’s market

This very exciting, action-packed week gets off to a slow start. Not much on the schedule for today. Most of the day’s interesting indicators are already out.

Canada’s housing starts are expected to rebound but still be a bit below trend as unusually cold weather has hampered building. The figure has gained more importance recently as “housing activity” is one of the two “sources of reslience” that the Bank of Canada is monitoring to guide its future interest rate decision (the other being “consumer spending”). Given the unseasonably cold weather, I think this figure is good enough to calm any fears for now at the Bank. CAD positive

There are no forecasts for the NAB business sentiment series, but it does seem to affect the AUD when it’s released, so here’s a graph. As you can see, the diffusion indices (DIs) have almost gone into negative territory recently but rebounded. I think if they stay positive that’s AUD neutral, if they go negative then it’s AUD negative.

China’s inflation data is expected to show a continued rise in the consumer price index (CPI), but of course that’s due particularly to pork prices – the problem is, the poor pitiful piggies are plagued with African swine fever, aka “pig ebola.” The producer price index (PPI) is the important point for foreign people, because that’s what they pay for products imported from China. And the PPI is expected to remain unchanged, so it’s basically neutral for AUD and NZD and any other currencies affected by it.

DISCLAIMER

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The information and opinions in this report were prepared by Marshall Gittler and do not represent Fairmarkets’ views or opinions. Though the information herein is believed to be reliable and has been obtained from public sources believed to be reliable, the author makes no representation as to its accuracy or completeness. This report is provided is General Financial Advice and does not take into account the particular investment objectives, financial situations, or needs of individual traders. It is not an offer or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy.

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The author is not acting as a financial adviser, consultant or fiduciary to you or any of your agents (collectively, “You” or “Your”) with respect to any information provided in this report. Information contained herein is being provided solely on the basis that the recipient will make an independent assessment of the merits of any investment decision, and it does not constitute a recommendation of, or express an opinion on, any product or service or any trading strategy. The information presented is general in nature and is not directed to retirement accounts or any specific person or account type, and is therefore provided to You on the express basis that it is not advice, and You may not rely upon it in making Your decision.

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The author may hold positions in any of the currencies or commodities that are mentioned here. He may also be holding debt or equity securities in any of the markets or issuers he writes on.

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‘The key is not to predict the future, but to prepare for it.’ Pericles, 500 BCE

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