It was too good to be true. Reality had to make a return. The "single unit" has managed to slip against the "mighty" dollar as relief by investors over the fiscal cliff deal has given way to doubts about the deal's true worth. There are concerns that U.S. lawmakers have merely kicked "that can" further down the road. Congress' last gasp deal this week seems again to have delayed spending cuts, this time by two months. The end result: investors should be expecting another standoff between the Democrats and the Republicans in the coming weeks.
Some key U.S. economic issues remain unresolved, as the final vote in Congress has only temporarily averted the immediate pain of tax hikes on U.S. citizens. Capital Markets should expect investor focus to soon shift back to raising the U.S. debt ceiling negotiations. A successful compromise would allow the U.S. government to continue borrowing and fend off the possibility of default. It is now feared that some Republicans could become more “obstinate in negotiations this time around” on the belief that they have already given up too much in the latest deal. It’s no wonder that this week’s initial relief rally ended so abruptly. Not helping is tomorrow's NFP report. Investors have been naturally reluctant to make any bold moves ahead of the report, especially in this illiquid forex market.
This mornings weekly U.S. jobless claims report coupled with the ADP payrolls data should provide a hint to tomorrow’s monthly employment report. Analysts expect this week’s claims release to recoup some of last week's holiday impacted drop to +350k. At the same time, consensus is looking for an uptick in the ADP reading of +15k to +133k. The unknown variable for tomorrow’s employment number is expected to be "storm related construction hiring." Also reported later today is the minutes to the Fed’s December meeting. The release will allow the market to perhaps get a better handle on Ben’s new conditional policy guidance.
Despite the market trading thin, data releases have and will be fast and furious for the remainder of this year's first trading week. Over night in Asia, investors witnessed China’s non-manufacturing PMI rising for the third-consecutive month to 56.1 in December from 55.6 in November. Digging deeper, the new orders index increased +1.1 points to 56.1, and ending up being the highest score for the last calendar year. The report showed strengthening activities for the construction and service sector, a good combination to aid domestic demand and current Chinese growth momentum. This is certainly a good mix to keep global investors somewhat optimistic.
The euro region has provided a mix bag of results this morning. ECB data shows that credit conditions in the region remained weak in November. There has been a continuous drop in private sector lending (-0.8%) and no change to the broad money supply. Despite the liquidity position of eurozone banks improving overall last year, private sector lending has not seen any uptick. Even the ECB’s decision to cut the deposit rate to zero has had little impact. Demand for credit continues to be impeded by euro and global growth concerns and the market's uptick in risk aversion.
The two main principals, reason why most trade the EUR and GBP, released data not positive to their economic situation. The investor is left to "pick the best of a bad lot" when it comes to these currency pairs. The number of unemployed in Germany edged higher last month (+3k), but managed to beat market expectations. The seasonally adjusted unemployment rate now stands at +6.9%. Employment conditions for Europe’s backbone remain upbeat when we compare it to most members in the Union. The periphery states are reporting +25% unemployment rates!
Activity data in the U.K. construction industry fell quicker than expected last month, driven mostly by the weakness in house-building (PMI construction: 48.7 from 49.3 in November). Coupled with a steepening decline in "new" business certainly signals further future trouble ahead. New business levels have now fallen for a seventh consecutive month. When it comes to EUR/GBP, sometimes it’s about picking the best of the worst!
If there is no need, then patience is to be applauded. There will be plenty of opportunities for investors to act out their strong market conviction thats been supported by fundamentals, technical and liquidity. For the time being, it has been a “crap” shoot amongst the sharp retracement of yesterday’s EUR gains. Markets focus will now be switching to tomorrow's NFP release. Because so many have missed this move, selling EUR upticks is the favored strategy once more. Convincingly through 1.3100 does open up a hole for some!