20141205 – HMMMMMM… OK!

Big data day today with US non-farm payrolls updating us on the crucial employment situation in the United States. The health of employment prospects and wage growth will be key for the Federal Reserve to determine when it is appropriate to begin normalising interest rate policy. Economists are forecasting 225,000 new jobs which would be a small improvement from the previous month, this translates to a stable unemployment rate. Perhaps as interesting will be average hourly earnings, where economists forecast a 0.2% month on month gain, slightly better than the 0.1% gain the previous month. It’s worth noting that revisions to prior months data is also an important data point, historically as employment improves the revisions tend to reveal that the initial estimates have under-estimated job growth. I was looking at some analysis last night which suggests that the month of November is susceptible to a larger level of revision than the average (71,000 vs 23,000). What this means is that even if the number comes out in line with the forecast we could see a substantial upward adjustment in the months to come which will highlight the robust recovery in the US.


But what about yesterday? We had no change in terms of interest rate at both the Bank of England and ECB, but the key moments were after the announcements with Mr Draghi at his press conference, where he reiterated his plan for new measures to expand the ECB’s balance sheet by 1trn euros. However it’s clear that there are tensions on the governing council, as the word used was “intends” and not “expecting” which sounds a good deal less certain. Needless to say during the press conference EUR/USD aggressively reversed from a new year to date low of 1.2280 to above 1.2450 before trying to recover lower later on in the afternoon. Fun and games! The lack of unanimity continues to make the ECB look considerably less decisive than its peers, and as a consequence one could argue that it has relatively less credibility as well. It doesn’t help that whereas the Federal Reserve is clearly planning on looking through the impact of lower energy prices on inflation (which is what most analysts will do), the ECB continues to use the disinflationary impact as an excuse to implement yet more monetary easing.


Oil prices are back near the lows again, and this is reflected in the weakness of the Mexican peso, Canadian dollar and Russian rouble. In fact with a lot of these oil rich currencies, you almost don’t have to look at them to determine their direction at the moment, just have a look and see what the price action is in Brent or WTI! Liquidity arrives a bit later for the naira, but I would imagine the Nigerian currency will also be under pressure after some calmer price action in the last day or two. There are signs that the Kremlin is starting to feel pressure from the collapsing value of the rouble. Yesterday President Putin threatened to take on the currency speculators, who clearly he blames for Russia’s currency woes. Nothing to do with Russia’s oil dependency then? Hmmmm…. Ok!


It seems that we’re set up for continued dollar strength today, as well as rising equity markets, but there might be some caution in front of the data event later. The S&P 500 made another record high yesterday, but doesn’t it always these days? I should also point out that we get Eurozone GDP data later this morning, expectations are for 0.8% year on year growth which would be unchanged from the prior quarter. It’s an interesting number, but as GDP is such a lagging indicator I’m uncertain how much of an impact it will have on currencies.