The past week ended with a string of better-than-expected data releases from key major economies, suggesting the global recovery may avoid a more worrisome downturn. Mostly better than expected PMI’s from Europe, UK, China and the US were supplemented on Friday by a much stronger US employment report than was expected. We’re cautiously optimistic that the better US jobs report is a valid signal that the US recovery is improving, but we’re also aware that January employment numbers are especially volatile due to seasonal factors, and subject to major revision. The decline in the unemployment rate in the January report, in particular, is also suspect due to the inclusion of new population data from the 2010 census. The best way to interpret the data is as though the unemployment rate was already at 8.3% in December as opposed to having declined in January.
The series of more upbeat data allowed the current ‘risk on’ rally to extend further, but with a few notable twists. Of special note is that markets continue to differentiate between currencies based on the prospects for respective central banks to expand their balance sheets further (quantitative easing or QE). We saw this last week following the Fed’s lower-for-longer rate pledge and Bernanke’s mention that QE3 remains an option, which sent the greenback lower across the board. Following Friday’s jobs report, which we think delays (at the minimum) potential Fed QE3, the USD rebounded against EUR and GBP, but lost ground to other major currencies like AUD, CAD, and NZD. The key there is that EUR and GBP, whose central banks are expected to continue asset purchases/balance sheet expansion, also lost ground to AUD, CAD and NZD, whose central banks are not expected to initiate QE. Gold prices also declined sharply on Friday, revealing the yellow metal’s strong relationship with the likelihood of Fed QE3.
We expect this dynamic to continue to influence near-term trading conditions and incoming data will remain an important driver. Next week doesn’t see too much in the way of top-tier data for the majors, but what does come out could have a larger impact than normal (e.g. Australian retail sales, German factory orders/industrial production, Canadian Ivey PMI, and UK industrial production).
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