A crazy day may await the markets − watch the JPY!

Fri, Mar 7 2008, 07:41 GMT
by John Hardy

Saxo Bank

US employment report on tap - bad news expected. Canadian employment report also up today.

MAJOR HEADLINES – PREVIOUS SESSION

Overnight developments:

• US Feb. ICSC Chain Store Sales rose 1.9% vs. 0.6% expected

• Australia Feb. AiG Performance of Construction Index fell to 53.9 from 58.3 in Jan.

• Japan Feb. Official Reserve Assets rose to USD 1008.0B from USD 996.0B in Jan.

• Japan BoJ kept the target rate unchanged at 0.50% as expected

THEMES TO WATCH – UPCOMING SESSION

Key event risks today (all times GMT):

• US Fed's Fisher to speak in France (0800)

• EuroZone ECB's Trichet to speak on inflation (0800)

• EuroZone ECB's Constancio to speak (0900)

• Norway Jan. Industrial Production (0900)

• US Fed's Yellen to speak at Banque de France conference (1000)

• Germany Jan. Industrial Production (1100)

• EuroZone Jan. OECD Leading Indicator (1100)

• Canada Feb. Unemployment Rate and Net Change in Employment (1200)

• New Zealand's Bollard to speak (1245)

• US Fed's Mishkin to speak (1330)

• US Feb. Change in Nonfarm Payrolls(1330)

• US Feb. Unemployment Rate and Average Hourly Earnings (1330)

• US Fed's Kohn to speak (1500)

Market Comments

The markets seem to be building up a lot of energy as we head into the final trading day of the week and the big US employment report. All signs are that the change in nonfarm payrolls number and unemployment rate will continue to show a deterioration in the US employment number. With negative expectations built into this number, considerable downside surprise may be needed to trigger volatility on the numbers. An upside surprise is hard to imagine, but would cause a short term spike as it is the least expected of outcomes. After yesterday's continued move to risk aversion and equity sell-off, the market is bidding up EuroDollar STIRs as the idea of the 75 bp cut, or yet another intrameeting cut from the Fed gains popularity. Meanwhile, Euribor dumped on Trichet's jaw-dropping hawkishness - so that was the interest rate confirmation of the strong continued EURUSD move upward.

The Canadian employment report is also up today as USDCAD is trying to figure out which CB outlook is more dovish and weighing the implications on the loonie of crude at 105 dollars a barrel. 2-year rate differentials suggest that the pair should be finding some support, but the USD weakness hysteria and commodity angle seem to be dominating at the moment. Still, any extreme risk aversion could bode ill for CAD.

After Trichet's extraordinary hawkishness yesterday in light of market conditions, we wonder how much more the USD weakness can stretch in the near term, now that we met our basic round number 1.5400 target in EURUSD. To put it shortly - we dare not try to call a top until we some real signs of resistance, and the next Fibo extension looks like at 1.5590 isn't a crazy idea if this trading environment continues and the talk of more aggressive Fed cutting. We wonder how Mr. Trichet managed to surprise the market once again with his hawkish stance as we should now by now that he is going to come out with guns blazing on inflation, but risks in credit and from the strong EUR look so terrible of late, that we still have a hard time fathoming it. If the EuroZone catches a cold in the months ahead, as is virtually certain, Mr. Trichet is going to have a lot of explaining to do. In USDJPY and USDCHF, the big round 100 and 1.0000 may close fast...

The BOE decided to pass up the chance to cut rates this time around as largely expected and the psychological 2.00 barrier in GBPUSD fell swiftly. The pair even zoomed up and through its 200-day moving average at around 2.0125 and there are few technical resistance levels of note until 2.0450.

The market to watch today will likely be the US equity market as yesterday saw considerable new downward momentum entering the picture. Looking over at our credit risk indicators, the red lights are flashing everywhere and we wonder it this could be the beginning of "the big one" - some kind of capitulatory market sell-off that has oddly not materialized after the late January panic. (On troubles in the credit market, see the excellent article over on bloomberg.com about how the frantic rate slashing from the Fed is not lowering borrowing costs due to the extreme illiquidity and risk aversion in credit markets) In any case, long JPY is the obvious trade to have on in that event. Oddly, overnight, the JPY crosses managed to stay relatively bid, with the "riskiest" crosses like AUDJPY and NZDJPY actually rallying sharply off lows - that one is a headscratcher - but perhaps just another commodity-driven rally.

But let's see how things look once the North American trading session is well underway. It would seem that AUD and NZD either make a bold stand here as "the big one" fails to materialize, or that they crumble spectacularly if equities head steeply lower.

Be very careful out there today - market could see extreme volatility today.