Sunday, 7 April 2013

US Economic Data Continues to Disappoint - Both USD and Equities Hurt

Ralph Shell, Excel Analyst

Friday's Non Farm Payroll (NFP) Report (05 April 2013) continued a string of US reports that fell short of expectations.  According to this report, only 88K jobs were created in March, far less than the 190K estimated.  They did upwardly adjust the February numbers from 236 to 268, and the Jan number went up from 119K to 148K.  The markets, however, are moved by headlines, not footnotes, so this number put pressure on equities and the USD.

Briefly, the reduction in the unemployment rate to 7.6% gave the bulls some satisfaction until the details were examined.  There was a reduction of 663K Americans who gave up the job search, joining the ranks of the permanently unemployed.  The number of those of who are of working age, and still in the work force, is now down to 63.3%, the lowest  since 1979.

The US Trade Balance was still a big deficit, -$43B, but less than forecast.  This resulted from changes in the energy trade.  The glut of US oil production has caused domestic crude inventories to replace and consequently slow imports.  Since there is a US law which forbids the exports of crude, but does not stop the exportation of refined products,  refiners in the Texas Gulf are busy exporting the higher-valued refinery products. The energy deficit narrowed to $21.2B in February.

We have been wary the USD is vulnerable to a sell-off.  The economic news was deteriorating, at a time when the specs were carrying big USD longs positions.  The numbers Friday prompted a rally in the euro, (FXE) pound (FXB), and, to a smaller extent, the Swissie.  The latest COT report showed a sizable shorts 94K in the pound versus the USD, and 59K in the euro versus the USD.  The weekly charts show a bullish engulfing candles in both the pound and the euro.  Specs, with the bigger short interest in the pound, might be more vulnerable.  A rally to the 1.56 handle might develop.

Click on EURUSD Forex Chart to Enlarge

Watching the action in the euro on Friday, you just might have been impressed with the market's ability to move to the topside of the 1.30 level and hold; if the market is able to stay north of the 1.30 handle, the euro rally may not be over.

Click on GBPJPY Forex Chart to Enlarge

For the week gone by, though, the big mover has been the yen.  Prime Minister Abe's shock and awe has found some new believers.  Thursday, 04 April,  the open interest in yen futures at the CME was up 15.6K contracts.  The big OI increase came despite the CME increase in the margins on the yen and yen pairs.  Usually when the margin rates go up, this chases traders out of the market, and often cools volatility.  The action of the yen is impressive, but can there be more?  Could it be that fears of a North Korean attack have caused some yen selling?

Click on USDJPY Forex Chart to Enlarge

Perhaps overlooked in Friday's news are negative numbers coming from Canada.  The unemployment rate jumped to 7.2%, as there was a loss of 54.5K jobs in March.  The trade balance was also a disappointment, a negative C$ 1.02B.  Just as in the US, recent reports of economic activity in Canada seem somewhat subdued.  The loonie has been a minor loser to the USD today but perhaps the weakness is tempered by the European selling of the USD.  We will take a closer look at this going into the coming trading week.
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