The first week of the month is always dominated by the release of US employment data. The figures released on the 1st Friday of the month are the first insight we get into the previous month’s US economic performance. So when Friday’s figures were announced, we were not at all surprised that the markets were volatile. The growth in non-agricultural jobs was disappointing though; 431,000 jobs were created last month and that is a good thing but closer analysis of the numbers reveals a disproportionate number of temporary jobs within that figure and the markets were expecting a much higher number of permanent positions, so the US Dollar should weaken then shouldn’t it?
Well no. The Dollar strengthened as investors still felt more compelled to buy into the safety of the US treasury market than into anything risky. Incidentally, shares in the Far East fell the most in 15 months over the weekend just to emphasis the current aversion to risk amongst investors.
Dollar strength translated into weakness elsewhere and whilst the Pound slipped against the US Dollar, the Euro fell much more markedly. A break below $1.20 on the Euro - US Dollar exchange rate was expected in the longer term and the fact that this exchange rate had propped itself up on the technically crucial 50% retracement level between its all time low and all time high and looked vulnerable at that point, was sufficient reason to suspect a fall but the timing of that fall was always a debate. The effect of this drop on the Sterling - Euro exchange rate is that we are now at the highest levels seen in 19 months.
Euro weakness can be attributed to all manner of negative news Hungary declaring it is almost certain to go the way of Greece was seen my many as a catalyst for Euro weakness but quite how much effect the default of a non-euro economy on the edge of the Eurozone could have on the Euro itself is open to question. The EU debt crisis continues though and there can be no doubt that EU banks will have significant exposure to Hungary. Analysts are also wary of the legal challenge being considered in the German courts over whether the German government can legally commit German taxpayers’ money to support Greece and any other country in trouble in the Eurozone. This is the first of a number of legal challenges to the €750 billion fund and this consideration along with the general market preference for safety rather than risk explains the Euro being at its weakest ever level against the Swiss Franc. ‘Lowest ever’ sounds awfully dramatic and we often hear of things being the best or worst since ‘records began’ but we know that Euro records began in 1999 when the currency came into being in electronic form.
But the big question is whether it can last. In a survey published over the weekend 12 of the 20 economists asked thought the Euro would cease to exist within 5 years and rather than the small nations being asked to leave, most seem to think it will be Germany deciding to leave that will spark the fire that causes the burning of the Euro treaties. On his basis, I don’t think we have seen the last of the Euro weakness.
This week brings interest rate decisions from the European Central Bank and the Bank of England but neither is forecast to move its base interest rate. What we are hoping for is some steer on when that might happen though and traders will be glued to their dealing screens on Thursday for that. In the interim, we have a plethora of other data releases to contemplate including, from the UK, retail data from the British Retail Consortium, a consumer confidence report and the trade balance. From Europe, we get German factory orders and the trade balance and from America, we will get consumer credit data and the beige Book, a very significant document outlining the overall health of the US economy.
In addition to the UK and EU interest rate decisions, the Reserve Bank of New Zealand will also be making its mind up over interest rates on Wednesday. Traders are widely expecting a 25 basis point interest rate hike from the RBA which will bring their base rate up to 2.75 percent. So whilst we s tart this week with a very weak NZ Dollar, don’t bank on that position remaining through to the latter part of the week.
And it is also worth watching the Canadian Dollar for slickers of weakness; Friday’s Canadian employment data was quite upbeat and that chimes with pretty well every other data release form Canada of late but oil and commodity prices are slipping so there will be some strain on the strength of the Canadian Dollar as commodity exports yield lower returns. It is widely thought that the tar sands that yield most of Canada’s oil export are only economically viable when crude oil is fetching more than $60 per barrel so with the price of crude hovering around $70 per barrel, any drop in this level will be significant.
There is plenty to be thinking about this week and we will be on our toes for almost every moment of every day. This volatility is yielding some excellent buying and selling levels; those using the market volatility to their advantage are the ones with the broadest smiles.
And finally, most people don’t attend funerals unless they knew the deceased but one chap in New Zealand has been nicknamed, the ‘grim eater’ after attending up to 4 funerals a week and bringing Tupperware containers to stock up on free finger food. A quiet word from a member of the funeral parlour was all it took to stop the grim eater’s activities.