Wednesday December 9, 2009

The big overnight news from Asia comes in the form of a surprisingly strong Australian jobs report, which has helped bump the local dollar up sharply against currencies of lower yielding nations. Elsewhere China's State Council also fleshed out measures to boost consumption in order to maintain its health above-8% GDP growth but without encouraging excesses that have led to the highest pace of home price increases in many years.

The RBA's deputy governor told reporters today that owing to the yield differential between the Aussie and other developed nations' currencies, the carry trade appears to be back in vogue. Expectations for further interest rate increases in the nation nicknamed the wonder from down under were stepped up following the addition of 30,200 jobs of which only 300 were part-time. To put things in perspective, while the market was only anticipating a rise of 5,000 full and part time jobs overall, today's report for November brings the total number of jobs created to just 500 short of 100,000 in three months.

The jobless rate declined one-tenth to 5.7% as mining companies added to their labor force in order to provide sufficient output to satiate demand from China. Only this week the Governor Stevens at the RBA noted that his nation's mining industry was the envy of the world as it got back close to full capacity. Yet the rebound in Australian activity is widespread with retailers also adding jobs and business confidence continues to rise.

Still, there was more positive news from Australia's biggest trading partner overnight as the State Council posted changes to its stimulus plans. It seeks to prolong the economic recovery while reduce a potential speculative sideshow. For instance the government lengthened the holding period for homes in order to qualify for a tax credit. It used to be the case that sales tax would not be charged to sellers who owned property for two years. Today it was announced that the duration will rise to five years in the hope that the government can stave off hot money flowing into real estate seeking to take advantage from easy fiscal policy.

The government also maintained its measures to boost consumption by extending the duration of subsidies from appliances, autos and farming equipment in rural areas.

Aussie dollar - The Australian unit rose to 91.65 U.S. cents as a result of the firm data on Thursday, bolstered by the potential for more interest rate rises, which would boost the yield advantage it carries over low-yielding currencies.

U.S. dollar -The dollar is broadly lower although rose against the Japanese yen. Today delivers the weekly initial claims report, expected to show a third straight week of claimants below 500,000. This should be a slam-dunk in light of last week's clear show of labor market recovery. The last time claims were below half a million per week was in August 2008. The strength in the dollar during the past week has been responsible for driving back down the value of many alternative asset prices. Gold has slipped 8.3% from its recent peak just one week ago as the dollar vies for control. It would, however, be a mistake to confuse falling commodity prices with signs of economic slowdown.

Japanese yen -The yen ceded ground to the higher yields available on New Zealand and Australia following the glowing Aussie jobs report. The recent strengthening of the yen against the dollar served to remind investors that profits earned abroad may translate to lower profits in yen terms, which helped undermine equity prices regionally today. The Nikkei dropped 1.4% as the yen fell against the dollar to ¥88.34.

British pound - The Bank of England chose to take no further action at its final meeting for 2009 in a year that the Chancellor of the Exchequer now expects will see a GDP contraction of 4.75%. The Bank left its short benchmark rate at 0.5% today and maintained its plans to purchase no more nor any less than the £200 billion in progress. The pound rebounded slightly against the dollar after a dose of pessimism following the Chancellor's pre-budget delivery to lawmakers on Wednesday. The pound currently buys $1.6298 U.S. cents.

Euro -A whiff of inflation in the form of stronger German wholesale price data for November was partially responsible for investors lacking the desire to sell further the euro today. The euro rose and currently buys $1.4730 while it diminished against the rebounding pound to buy 90.40 pence.

Canadian dollar - Canada's dollar has rebounded sharply against the U.S. dollar in a move that started just after lunchtime on Wednesday. The fact that Canada remains a key role in commodity production helps explain the positive tone this morning following the Australian jobs report. The dollar buys 95.21 U.S. cents this morning and is far closer to Friday's peak at 95.80 following Canada's own blowout employment data that was eclipsed by U.S. payroll growth. The intraweek low for the Canadian dollar stands at 93.70 U.S. cents.

Andrew Wilkinson