Friday FX Interest Rate Monitor

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Includes: FXA, FXC, GBB
by: Interactive Brokers

The shortfall in the loss of U.S. jobs created a risk-on environment spurring immediate gains for equity index futures, while sinking the dollar and bonds. Yields surged as the 10-year U.S. note sank by three-quarters of a point.

Eurodollar futures – Eurodollar futures fell out of bed at the back end of the curve with the December 2011 contract slipping six basis points compared to twice that loss at the December 2012 expiration. The recent flattening in the shape of the yield curve took a nasty step backwards as much of the fears that have built into the curve went up in a poof of smoke. The net loss of 54,000 jobs during August is about half what the market had anticipated. The 67,000 gain in the measure of private employment is also a good 50% better than the forecast. In all a pretty bullish report that has caused a good deal of optimism about the health of the economy. The 10-year yield leapt 13 basis points to 2.734% on the news.

European bond markets – The bund contract was also rattled by events in the U.S. and stands almost one full point lower (Dec bunds trading at 130.35). However, the contract had cause to decline inspiring yield increases following Eurozone data released on Friday. Across the zone, retail sales for July rose for a third month putting in a 1.1% year-over-year improvement. PMI services data was static at 55.9 and ahead of expectations and indicates a resilient performance by domestic banks, retailers and insurance companies. Euribor futures dipped on the news sending implied yields higher by around three basis points.

Canadian bills – Canadian investors have to wait a full week before finding out how domestic employers responded during August and the data will conclude a week during which the central bank may choose to lift official monetary policy for a third time. Canadian bill prices slumped in line with Eurodollars effectively enhancing the likelihood of a move. The U.S. report helps remove some pressure on the central bank to stand still, although the need to act swiftly is hardly urgent. Canadian bond prices fell sharply lifting the yield 10 basis points to stand at 2.968%.

Japanese bonds –Japanese bond prices continued to fall sending the 10-year yield four basis points higher to 1.135% after Mr. Ozawa banged his battle drum over currency intervention. His desire to boost public works spending is a clear negative for bonds given the need to issue more debt to fund spending. What’s less clear at this time is the likelihood of success for his challenge to Prime Minister Kan’s leadership.

British gilts – Short sterling futures had been in the green after a PMI services report indicated a likely slowing in the pace of British growth. December gilts reversed course following the U.S. labor report sending yields surging by four basis points to yield 2.99%. The services reading made a beeline towards the 50-line indicating neither expansion nor contraction. The dip to 51.3 was short of forecast and makes a weak comparison to European data released at the same time.

Australian bills – An unchanged reading for the official version of China’s PMI services sector at 60.1 and a rise in the same report from HSBC to 57.6 confirms the slowdown engineered by the Chinese authorities is likely over. The continued expansion in services activity helped improve the tone to risk appetite overnight and so weighed on monetary futures. Aussie 90-day bills closed lower by around 15 basis points across the curve as the rallying “risk-on” cry gave dealers cause to think that perhaps the RBA isn’t yet done with lifting rates.

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