Canadian Employment Boom Stalls, The Loonie Has A

Canadian Employment Boom Stalls, The Loonie Has A
The top market moving currency last week was without doubt the Canadian dollar. Though USDCAD didn’t see the largest percentage change among the majors (deferring that title to AUDUSD and NZDUSD), its sharp, end of the week move and the dramatic shift in fundamentals certainly won it a place of honor among volatility traders. The pair began the week with its usual chop as the first few trading days didn’t see any economic indicators, commodity markets had stalled in their respective advances and the greenback was treading water. All that changed on Wednesday though. In the past few weeks, forecasts for strong Canadian growth had already taken a serious blow when the physical trade balance contracted to its smallest positive balance since 1998 and the Ivey PMI survey reported its worst reading for business activity in six years. However, both of these shifts were more or less expected given the unfavorable exchange rates and waning demand from the US. The sharp drop in housing activity reported on Wednesday was not. According to government statistics, housing starts over the month of December plunged to an 187,500 annual pace – the lowest reading since April of 2002. Despite this shocking statistic though, the data was salvageable for Canadian dollar bulls as activity for the entire year was actually the strongest its been in 20-years. The rest of the housing data released the follow day was less dramatic, but still held a bearish tone. However, certainly concerning was the cooling in the annual reading of the New Housing Price Index for November to a 6.1 percent clip – extending a steady deceleration.
The real fireworks for last week were reserved for Friday. In the past few months, the Canadian employment report has been more market moving than the hailed US NFPs. Crossing the wires free from interference from the US payrolls report for the first time in months, the Canadian labor survey revealed the first drop in net employment in 8 months. This print was a blow to the long-term fundamental and event risk traders alike. For the latter, they were used to seeing the change marking a positive surprise that was at least three times the official forecast. And, for the fundamental traders, with their eyes on growth and the BoC, the tangible change for the consumer sector suggested all the largest sectors contributing to the Canadian economy’s impressive rise were now threatening its untimely decline. However, bullish conviction have not been fully snuffed out as we still require confirmation of a true change in labor trends, especially after wage growth accelerated to its fastest clip on record.
In the coming days, the economic train will certainly be throttled back. The first indicator of note is Thursday’s international securities transactions. Unlike the physical trade report, this indicator will struggle to command the attention of the trading masses. The same is true about the manufacturing shipments report for November – though a large shift could revive concerns over trade health. Regardless, technical traders will likely monitor the strength of 1.0250 to judge whether the USDCAD is already forming a new bull wave.– JK

Aussie Shows Few Signs of Slowing, but Much Depends on Labor Data
The Australian dollar joined other major world currencies and rallied significantly against its US namesake, with impressive Retail Sales and Building Approvals data serving to further boost the Aussie against other global counterparts. Extreme British Pound weakness forced the GBPAUD to its lowest levels in 10 years, but the Aussie dollar nonetheless underperformed against New Zealand’s buck—leaving the AUDNZD almost exactly unchanged. A broad sell-off in high-yielding currencies and risky asset classes was not nearly enough to contain the AUDUSD, however, as the Australian currency received a key fundamental boost from domestic Trade Balance, Retail Sales, and Building Approvals figures. The country’s trade deficit fell from a record A$2.86 billion in October to a better-than-forecast A$2.25 billion through the month of November. A surge in exports completely offset a smaller gain in imports, and the report generally improved outlook for Australia’s international balance of payments. In other similarly positive news, Building Approvals surged an impressive 8.9 percent in November—significantly better than economists’ forecasts for no change. A one-off 28.4 percent gain in Apartment approvals led the figure higher, but the report was otherwise generally upbeat and spoke well of housing prospects for the Asia-Pacific economy. Such housing market strength unsurprisingly coincided with robust Retail Sales results on the month, and outlook remains positive for domestic consumption trends.
Given consistently strong economic data, it seems as though the Australian Dollar may continue higher through the medium term. That said, economic outlook could potentially take a turn on key Employment Change figures due the 17th at 00:30 GMT. Markets greatly anticipate the key year-end labor report, as most are keen to watch whether or not the domestic jobs market continued its impressive growth through year-end 2007. Current consensus forecasts of a 20.0k are certainly on the optimistic side, but Aussie employers have shown little moderation in appetite for new workers. Such dynamics were easily seen through November when the economy added an incredible 52,600 new jobs. Adjusted for labor force participation, this would roughly correspond to a 700,000 jobs gain in the monthly US Non Farm Payrolls report. This is obviously a gross oversimplification, but it remains clear that Aussie labor market strength has been nothing short of impressive. Whether or not this can continue through the new year may determine outlook for consumption and housing trends, with Aussie traders to closely watch for any surprises from the highly anticipated report. – DR

New Zealand Dollar Left To Drift In Its Range
The New Zealand dollar shrugged off disappointing Trade Balance figures to finish significantly stronger against the greenback to finish the week’s currency trading. The Kiwi saw its strongest rallies against the US dollar on commentary from US Federal Reserve Chairman Ben Bernanke in which he quite plainly said that the central bank stands ready to cut rates “substantively” in the face of domestic economic slowdown. Such frank words easily allowed forex markets to pound the already-downtrodden USD, while a simultaneous rally in global risky asset classes provided a double-boost for the NZDUSD currency pair. A recent improvement in investor risk sentiment certainly bodes well for the Kiwi, and a solid NZDJPY rally proved the point. Yet it remains to be seen whether the high-yielder can hold its ground on yields alone—especially as it sees strong competition from the similarly high-yielding Australian dollar. Our technical analyst Jamie Saettele believes that the Kiwi could see major declines against the euro, with a topside breakout in the EURNZD a distinct possibility through upcoming trade. See our EURNZD Outlook for more.
Whether or not the Kiwi continues its recent run may very much depend on upcoming Consumer Price Index figures on the 16th, with Reserve Bank of New Zealand interest rate expectations hanging very much in the balance. According to some forecasts, year-over-year CPI inflation will break above the RBNZ’s 1-3 percent target range at 3.1 percent. Such a result could easily alter forecasts for domestic yields, and an above-consensus result could only bolster the case for higher New Zealand interest rates through 2008. The Kiwi already enjoys the highest official interest rate of any currency with the highest S&P Sovereign debt rating, and any rises in the record 8.25 percent rate could only further boost yield-linked demand for the NZD. That said, it will nonetheless be very important to watch the performance of global risky asset classes. Given that the high-yielding currency performs best in times of relatively low market volatility and equity market gains, it will be critical to monitor any unexpected tumbles in the Dow Jones Industrial Average or top Asian and European indices. Otherwise, Kiwi traders will watch Thursday’s Retail Sales report to gauge overall consumption strength in the small Asia-Pacific economy. – DR