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After a fairly quiet day in terms of North American economic developments, equities took a breather from their four day rally and slithered sideways for the majority of yesterday’s session, with the S&P finishing slightly lower by 0.03%, while cash VIX compressed by a little over 0.2 vols to trade down to 14.3%.   The trimming of long USD positions against the CAD had the pair probing south of the 1.1000 mark, however waning downward momentum stopped the pair from making any further significant losses past the important psychological level.

The overnight session kicked off with the Aussie getting mauled after it was released the Australian economy lost 3.7k jobs during the month of January, with the unemployment rate increasing from 5.8% to 6.0%.   Expectations had been for the economy to add around 15k new jobs over the month, so a second straight month where the labour market has shed jobs forced some of the weaker Aussie bulls to jump ship after the strong rally witnessed so far this week.   A further blow to confidence emerged in the fact that if it was not for a rise in part-time jobs, the headline number would have been even worse, as 7.1k full-time jobs were destroyed in the first month of 2014.

While investors had been increasing exposure to the Antipodean currency as rising business confidence and end to the central bank’s easing cycle alleviated some of the pessimism towards the Aussie, there is no denying the labour market remains soft, and the rebalancing away from the resource sector still has a long ways to go.   AUDUSD fell back through the 0.9000 handle after the data was released, and could spell trouble with continued price action below the round figure as it sets up the potential for a formation of a double top (January 13thhigh of 0.9086 and February 12th  high of 0.9067), creating a technical target in the low-0.80s should the previous low from late January be broken.

Elsewhere in Asia, Chinese authorities said they would be targeting a slower pace of export growth in 2014, aiming for 7.5% in the coming year, a good deal slower than the 10.6% growth that was just registered for January.   Whether it was the bad employment numbers out of Australia, or the guidance towards lower international trade in 2014 from China, risk sentiment was on the defensive from the get-go overnight, with the Nikkei slumping by 1.79% while the Shanghai Comp slipped by 0.55%.   Europe has been unable to insulate itself from the negative sentiment this morning, with the major bourses in the red heading into the North American cross; the FTSE, Dax, and Stoxx are lower by 0.64%, 0.30%, and 0.70% respectively.   Despite the risk-off atmosphere to the markets, the EUR has ripped higher after a short squeeze in EURAUD has left its crosses vulnerable to more short-covering and EUR buying.   EURUSD broke through some key technical resistance levels to prop itself in the high-1.36s, although the 1.3700 handle will prove the next big milestone the pair will likely have a challenge overcoming.

As we get set for the North American open, Retail Sales in the US for the month of January just hit the wires, decreasing by 0.4% from the prior month.   Expectations had been for a flat reading for the headline figure, with the core reading not looking too much better coming in with no change from December, worse than the 0.1% increase that had been forecast.   The rough start to 2014 for the American consumer is pressuring equity futures lower this morning, with the S&P currently telegraphing a sub-10pt open when the bell rings.   The weakness in equity futures had followed from the negative performance in global equities and the yen strength that plunged USDJPY south of 102, but the soft retail sales numbers has accelerated the quest for safe-haven assets this morning.   Despite the risk-off feel, the DXY is struggling this morning, hurt by both the EUR short-squeeze and the disappointing economic figures, dropping over 0.5% before the opening bell.

North of the 49th  parallel, the New Housing Price Index in Canada for December was also released, showing a 0.1% increase on a m/o/m basis into the end of the year, in-line with the median analyst estimate.   As one of the main lynchpins of economic performance in Canada, the housing market is forecast to lose some steam over the course of 2014, forcing some other areas of the economy to pick up the slack.   The challenge for Canada will be whether the heavy-lifting can be successfully transitioned from the overleveraged domestic consumer to external demand for commodities and manufacturing – without the housing market deflating before some of the excess slack in the system can be absorbed.

While there are some who feel the Bank of Canada might look to stoke asset prices by slashing rates from their current levels, we feel this would be a misguided policy step at this point, especially considering the Canadian housing market is one of the most overvalued market in the world by historical standards; the relative value of home prices to rents is 88% higher than the historical average, while the measure of home prices to income is 32% higher than the historical average.   Even though the BoC has noted that there are issues with their historical models for predicting the size of boost to the economy from a falling Canadian dollar (turning out to be less of an influence than it has in the past) we still feel the policy course favoured by the central bank is talks down the Loonie rather than cutting rates, hoping that a weaker CAD will stimulate foreign export demand.   The Loonie is slightly weaker against the big dollar this morning, although USDCAD has failed to move too far north of the 1.1000 handle.   There is a good amount of congestion being built just below the 1.1000 level on the charts for USDCAD, which if broken would open up for an attack of the lower daily Bollinger Band and the 50% fib retracement level from the January rally, an area in the low-1.09s.   That being said, the technical indicators are starting to move back into neutral territory from the recently oversold levels, indicating that the longer the 1.1000 barrier is defended, the sapping of downward momentum makes it more likely the pair begins another leg higher.

Further reading:

GBP/USD reaches new multi-year high on weak US data

US Retail Sales disappoint and fall – USD extends sell off