Treading Water or Squeezing USD Shorts ahead of NFP?

The jockeying for positioning ahead of the US employment report tomorrow will likely dominate trading today. It is obvious that the market has gotten very short the greenback again - could this mean a small squeeze ahead of tomorrow's report?

Riksbank

The SEK responded positively to the latest rate hike from the Riksbank, which was widely expected at today's meeting. Sweden's numbers have looked very strong on strong exports to the world economy and the Riksbank remains the only central bank among the G-10 for which the market is expecting any appreciable additional degree of tightening. The outlook in the statement was slightly downgraded due to conditions in the US and Europe, but the bank suggested that inflation could be much higher in 2011 due to a shortage of qualified labor, (That is assuming, of course, that Sweden's external markets don't hit a more significant than expected speed bump, which would see a sharp reduction in demand for Sweden's exports) and this underlines the rising forward expectations for Swedish rates. As long as risk remains on, the SEK should continue to thrive in this environment. The market is looking for about 50 bps more tightening for the coming year. The SEK's strength is also the SEK's vulnerability, however, if the perception of the global economy changes to the negative side.

ECB

Trichet was out putting everyone to sleep again today with nothing of particular note. There were tiny shifts on the comments on upside and downside risks, with discussion of downside risks countered by an upgrade to the projections for 2011 GDP growth (though the range was a still rather wide 0.5% to 2.3%). The unlimited loan offerings aimed at keeping the EuroZone financial system afloat will be extended into 2011. Mr. Trichet said at the press conference that there was no intention to signal any change on interest rates (no surprise there...). He also said flat out that a double-dip recession is not in the cards. No word yet as of this writing on the implications of Greek 2-year debt yielding 11%+ or on its prospects for a default, though it may be interesting to see how the ECB president responds on the sovereign debt issue in the question and answer session. It's worth noting that spreads on non-Greek EuroZone peripheral nations has eased off slightly since the government treasury market has consolidated, which works slightly in the Euro's favor.

UK House Prices

The latest UK house price data from Nationwide showed a sharp decline in prices in August by -0.9%, a truly alarming rate in fact if it continues. Below we chart the Nationwide house price index and note how smoothly the housing market seems to be reverting back to the negative post-bubble trend. There is still a long way to go to reach a full reversion to the long term mean. The weak house prices helped push the pound lower still today versus the Euro.

Looking ahead

A bit more US housing market data on tap shortly and overnight, we have the Australia performance of Service Index up tonight. Is anyone noticing that this survey has come in below the 50 level 9 out of the last 13 months and that the July reading of 46.6 was the weakest since July of last year? This suggests perhaps soem weakness on the consumption side of the Australian economy. We chart this below - note that the services survey was in steep retreat before the summer 2008 sell-off in AUD (when the market was so distracted with the commodity boom that it forgot to check other fundamentals).

Chart: AiG Service Survey vs. AUD Index

Note the weakness in the survey suggesting some weakness on the services side of the Australian economy. Is the market again at risk of focusing too much on the mining sector in Australia?

But most expectations are centered on the US nonfarm payrolls report and what it will show. Regardless of the number, the market has become so cynical about the release it is hard to believe that it will serve as a decisive catalyst unless the unemployment rate surges much higher (or much lower, though that would almost criminally misleading) or the private payrolls are out at a couple of standard deviations or more of expectations. With the USD decidedly under pressure in recent days, a small squeeze on USD shorts seems the most likely short term development, since every move of late seems to fail to develop any persistent momentum. Tomorrow will be a key test of the dollar since it has drooped this week (though it must be pointed out that the dollar index has traded in a ridiculously tight range over the last three weeks...).

A great commentary, by the way, from Bloomberg's William Pesek on the JPY and the Japanese government and economy. Worth a read.

Worth noting on the fixed income market: the US is planning a the smallest auction of 3-,10- and 30-year treasuries next week since the middle of last year. For perspective, the record for this combination of securities was from February, when $81 billion were auctioned. Plenty of market participants wish they had bought their 30-year T-bonds when they were yielding above 4.5% then as compared with sub 3.75% levels now. Estimates for future borrowing by the treasury are also lower. The reason behind the lower auction amounts, according to a Daiwa securities analyst quote in a Bloomberg article are a combination of stabilizing deficits and the Treasury's desire to hold a lower cash balance. In any case, it will be interesting to see how the supply/demand balance works out as usual. The incredible decline in treasury yields over the last couple of months tells us something about the market's fear level, though that fear level hasn't been particularly elevated by other risk measures, which obviously improved sharply after yesterday's strong move to the upside in equities.

Economic Data Highlights

• US Aug. Domestic Vehicle Sales out at 8.66M annualized vs. 8.85M expected and 9.11M in Jul.
• Australia Jul. Trade Balance out at 1888M vs. 3100M expected and 3438M in Jun.
• Switzerland Q2 GDP out at +0.9% QoQ and +3.4% YoY vs. +0.8%/+2.6% expected, respectively
• UK Aug. Nationwide House Prices fell -0.9% MoM and rose +3.9% YoY vs. -0.3%/+4.9% expected, respectively
• Switzerland Jul. Retail Sales rose +3.9% YoY vs. +4.9% expected and vs. 6.6% in Jun.
• Sweden Riksbank raised rates +25 bps to 0.75% as expected
• UK Aug. Construction PMI out at 52.1 vs. 53.2 expected and 54.1 in Jul.
• EuroZone Jul. PPI out at +0.2% MoM and +4.0% YoY vs. +0.3%/+4.0% expected, respectively
• EuroZone ECB left rates unchanged at 1.00% as expected
• US Weekly Initial Jobless Claims out at 472k vs. 475k expected and 478k last week
• US Weekly Continuing Claims out at 4456k vs. 4450k expected and 4479k last week

Upcoming Economic Calendar Highlights

• US Jul. Factory Orders (1400)
• US Jul. Pending Home Sales (1400)
• US Aug. ICSC Chain Store Sales (1430)
• Australia Aug. AiG Performance of Service Index (2330)
• Japan Q2 Capital Spending (2350)