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German jobs data shines as unemployment change drops 15K

Investor sentiment has gotten a shot in the arm this morning, with global equities seeing a levitation in early morning trade, picking stocks up off the lows associated with a depressed start to 2014.  Helping spur the jubilation in financial markets, Ireland successfully returned to the capital market spectrum, issuing a syndication of 10yr debt that attracted €14bn in bids.  The rosy developments overnight for the Eurozone didn’t end with one of its periphery nations illustrating that the implementation of reforms and austerity has made it possible for Ireland to return to the capital market arena, but also included the largest economy within the zone seeing its unemployment fall for the first time in five months.

The number of unemployed workers in Germany dropped by 15k in the month of December, better than the flat reading that had been expected, and thus increasing the chances of a strong finish to 2013 for the economic backstop of the zone.  Stealing some of the thunder away from the better than expected jobs numbers in Germany, the flash estimate of inflation for the zone in December dropped to 0.8% on a y/o/y basis, below the 0.9% reading registered in the previous month and the level economists had expected inflation to remain at for today’s release.  While the drop in inflation isn’t steep enough to suggest that Mario Draghi and the ECB will look to introduce some form of non-conventional monetary policy accommodation at this week’s Governing Council meeting, it does support our view that Draghi will not be able to idly sit on the sidelines when faced with lethargic consumer prices, with the ECB most likely taking a more accommodative stance towards monetary policy in early 2014.  The FTSE, Dax, and Stoxx are all in the green heading into the North American cross, while the EUR also gains strength on the encouraging employment print in Germany and the fact that the slide in overall inflation within the Eurozone was not as bad as it could have been.  The EUR has gained 0.1% against the USD this morning, with EURUSD creeping back into the mid-1.36s ahead of the opening bell.

Heading into the North American open, despite the potential for it to be the coldest day in 20 years for the eastern United States, equity futures are warming up and well established in the green after Janet Yellen was confirmed last night as next Fed chair and first woman to lead the central bank in its 100-year history.  The energy complex is also position nicely as benefactor of the colder than expected temperature faced on the eastern coast of North America, with front month Natural Gas futures up 0.74% and the equivalent calendar contract for WTI increasing by 0.51% to trade just shy of $94/barrel.  

The main economic focus in terms of data releases for the North American session were the Trade Balance figures that just hit the wires earlier this morning.  After squeaking out a tiny trade surplus in the month of October, expectations were that export growth would be back to lagging that of imported goods, and Canada would slip back into a deficit of $0.1bn for the month of November.  The official reading surprised to the downside, with exports and imports essentially remaining flat from the revisions to the October numbers, however the revisions showed the trade deficit was actually $0.9bn during the month of October.  While not holding as much prominence as the employment situation report to be released  on Friday, the Bank of Canada has highlighted the sluggish export growth as one of the key reasons for moving to a neutral stance in terms of future monetary policy decisions; therefore, the longer export growth remains subdued because of either structural issues or competitiveness, the longer it will take for the excess slack to be removed from the economy, which will be required to bring about the upward pressure on prices the Bank of Canada longs for.

South of the 49th parallel, trade balance figures for the US economy painted a brighter picture, with the country’s deficit narrowing from the downwardly revised October reading of $39.3bn to $34.2bn in November.  The contraction in the United States trade deficit outpaced the median analyst estimate, and puts the American economy on strong footing, increasing the likelihood that the “give-back” in GDP for Q4 might not be as large as some had previously forecast.

The Loonie had been on weak ground heading into the release, and with the double-whammy of worse than expected trade data in Canada coupled with the better trade data out of the US, the CAD has dropped 0.55% against its American counterpart, looking to make a run at the December high in the 1.0735 region.    

Later today Loonie traders have more data that is waiting to be deciphered, with the Ivey PMI numbers set to be released at  10:00am EST.  After a soggy PMI print registered by the RBC survey last week, expectations are still to see a rebound from the figures registered in November, with the December release increasing from 53.7 to 54.5.  A key sub index to watch will be the employment section of the report, as the November report showed a nice uptick to the 64.4 level, which was then followed up by a solid jobs number that saw the Canadian economy create just over 20k jobs that month.  Should we see another hefty employment print by way of the purchasing manager survey, it might be a strong indication of what is to come later in the week, and give corporates with exposure to USDCAD a hint at how to position heading into the end of the week.  The high from December at 1.0735 will be a key area to watch, as a sustained break of that level on a soft PMI number could open up the door for the pair to test the mid-1.08s.

Speaking of employment, the ADP Non-Farm Payrolls for December is set to be released  tomorrow  morning, with the result most likely giving a good indication of what we can expect from the official BLS data set on  January 10th.  The three and six month moving averages for both the ADP and BLS reports match up quite nicely, and thus may take some of the shine and associated market reaction away from Friday’s numbers.  Currently, the median analyst estimate according to Reuters polling data is for the ADP report to show that 200k new jobs in the private sector were created over the month of December, and should the actual print come in anywhere within the 180k – 220k range, this should likely be sufficient for assuming the tapering experiment from the Fed will continue at a gradual pace of $10bn per meeting.  Anything outside of the aforementioned bounds could give the market a bit of a jolt, with a stronger than expected reading giving the USD a boost on the assumption another robust print upwards of 200k from the BLS could see the Fed move more aggressively at its February meeting.  Make sure to speak with your dealing teams heading into the numbers, as the middle of the week could dictate price action in USDCAD before the all-import jobs numbers  on Friday, creating some attractive trading opportunities on both sides of the market.

Further reading:

EUR/USD Jan. 7 – Rangebound As German Numbers Shine

USD/JPY: Trading the ADP Non-Farm Employment Change

Karl Schamotta

Karl Schamotta

Director, FX Strategy and Structured Products at Cambridge Mercantile Group.