Continuing yesterday's trend when the Europeans and the Chinese cut their bank rates, and the Brits commenced another £50B of quantitative easing, today's numbers continued bearish. Most significant were the U.S. employment numbers.
The U.S. total unemployment number remained unchanged at 8.2% as expected. There was a .1% increase in the U 6 number that measures the underemployed (part timers and those employed in situations, but are beneath their calling.) Of greater importance to the markets is the Non-Farm Employment Change report. The guesstimates had been for a small number, only 100K new jobs, but the 80K was even weaker than had been estimated. There was an 84K increase in the private sector, professional services (47K) healthcare (13K) and manufacturing (11K), which meant there had to be a small reduction in public sector jobs.
The job growth, though poor and the worst quarter since the recovery began, is still positive. Consequently some of the pundits think the number is too good for the Fed to resume its QE. This is contributing to the weakness in commodities, and probably resulting in selling of the risk currencies like the Aussie and the Kiwi.
Pressure has remained on the euro today. The poor economic news is certainly part of the weakness but Spanish 10-year bonds trading close to 7% are a reminder the euphoria over last week's summit was unwarranted. We have been bearish on the euro, with 1.23 as a target. Now at 1.23, a two-year low of the euro versus the USD, is there more to go or are we due for a little consolidation? With many of the Central Bank meetings and some major reports behind us our vote is for a quieter week, though the FOMC Meeting Minutes next Wednesday may prove an exception.
There was an interesting report from Switzerland this morning. It reported its foreign currency reserves had grown to 303.8B up from 237.6 the prior month. As we know the Swiss National Bank has pegged the value of the franc with the euro at 1.20. When there is pressure on the euro, the SNB has to buy the euro and sell the SF to keep the peg. The report today shows it has been accumulating ample supplies of foreign currencies, probably defending the peg.
What it does with the euros once it buys them we do not know. There have been rumors it has been buying Swedish and Danish currencies, as well as German bunds. Will the day come when the SNB is no longer able to defend the peg. How many euros will it be required to buy until it throws in the towel?
The SNB does not seem concerned with the USDCHF spread, which has widened from about 71 to 97 in the past year. Maybe, in fact, the USD market might be too big for the SNB to defend. If some big players decide at the right spread they wish to own the SF rather than the USD, what will the SNB do with this one? Or what happens if there are defections from the euro group. Sure Greece would be painful, but what if Germany left. Would that take the euro under 100?
Some day a long Swissie going to make a lot of money. Timing is everything.
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