Greece extends buyback offer – EUR27bn out of 30bn believed already tendered

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10th December 2012

USD firm but news on fiscal cliff negotiations awaited

ON BULLETS

• Greece extends buyback offer – EUR27bn out of 30bn believed already tendered

• China industrial output and retail sales both stronger than expected at 8 month highs

• Canada to approve CAD15bnm CNOOC purchase of Nexen and 5.2bn Petronas bid for Progress Energy

• EUR short positioning on CME reduced to lowest since August 2011, JPY shorts rise further in week to Dec 4

USD The USD maintained its stronger tone on Friday. The US employment numbers were certainly on the strong side of expectations (see spotlight below) but don’t change the likely policy stance from the Fed at this week’s FOMC.

The main focus for the market this week should be how the Fed will offset the end of Operation Twist. The market is looking for an extension of QE into treasuries of between $30bn and $45bn. The bigger the QE the more negative the initial USD reaction is likely to be. For today, the USD’s firm tone seems likely to persist, but the USD index is likely to encounter major resistance in the 80.75-81.00 area.

EUR The Bundesbank cut in their 2013 growth forecast from 1.6% to 0.4% on Friday helped keep the EUR under pressure, even though the new forecast is broadly in line with market expectations.

The comments from the ECB’s Makuch (Slovakia) indicating an ECB willingness to cut rates also weighed on the EUR, though his comments may have overstated the dovish consensus.

In practice, the market is already pricing a significant risk of a rate cut early next year, so EUR downside on this story looks quite limited from here. Nevertheless, there may be scope for a move into the mid-to-low 1.28s in EUR/USD, especially if the French and Italian production data disappoint.

GBP Weak UK production data on Friday provided more evidence of probably weakness in Q4, though similar weakness in Germany suggests this could be a seasonal glitch, given stronger German orders in the same month. Sterling has still held up reasonably well given the lack of alternatives, with EUR/GBP dipping on Friday in response to the weaker European growth forecasts and ECB talk.

But continuing talk of a potential UK downgrade makes sterling’s strong performance this year look hard to sustain indefinitely if growth remains weak, especially in view of weak trade performance. We see this dip in EUR/GBP as a buying opportunity for a move above 0.82.

JPY In spite of an initial strongly negative yen reaction to the US employment numbers, the November high at 82.84 didn’t break and now looks likely to hold until the Japanese election.

There is a lot of expectation of BoJ easing following the December 16 election, but we suspect that nothing much will be forthcoming from the BoJ in the short term, given recent aggressive action, so we see potential for a yen recovery into the election, especially if US fiscal cliff concerns start to increase as the end of the lame duck session this week approaches.

Spotlight – US unemployment decline encouraging – On the face of it, the fact that household employment actually fell in November, in spite of the decline in unemployment, is a sign that the decline in the unemployment rate is less impressive than it seems since it is based on a declining labour force rather than rising employment.

But while this had been the case earlier this year, Friday’s numbers were actually the first in a while to show a decline in the labour force, and the underlying trend has been slowly picking up since last year.

It is still the case that the labour force isn’t quite growing as fast as it usually has at this stage of the cycle (see chart below) but it is rising, and that makes the decline in the unemployment rate more impressive than it was in the early stages when it largely reflected a declining labour force.

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