Citi's Take On What Yesterday's Market Action Means For FX, And What To Look For In Today's NFP

Tyler Durden's picture

From Citi's Steven Englander

1) The euro was hit by three forces today:
        -- the Portuguese bailout was badly received from the get go
        -- the ECB was not 'strongly vigilant'
        -- ECB President Trichet's very strong endorsement of what was a very lukewarm Geithner/Bernanke restatement of the strong dollar policy
2) Risk correlated currencies were hit by:
        -- a sequence of extremely weak US and euro zone economic releases
        -- long-risk positions that have not been whittled down
        -- knock-on effects from even bigger moves in commodity prices
For the most part, investors did not seem panicked. Given how many risk pullbacks there have been this year followed by renewed risk buying, position cutting may be relatively limited. Bad news on payrolls could induce the volume moves to match the price moves. Through early this week CitiFX PAIN continued to show long positions pretty much across the board in risk-correlated currencies. No asset market is priced for a 0.5% downward revision to global GDP growth.
Some investors may be holding on, anticipating that reserve managers will come to the rescue, selling USD, buying EUR and the G10 smalls, and putting a floor under commodity prices. Reserve managers may have different incentives. They are much better off from 10% lower oil prices than from the diversification benefits of selling another couple of hundred million USD for reserves diversification. As long as they do not see each other selling USD they may choose to stand back, especially because their economic data has not turned down nearly as sharply as G10 has.
The string of bad economic releases is consistent enough and bad enough that a weak NFP number tomorrow is risk off and USD positive. The published range has a central tendency of about 155k to 225k. The most forecasts with a May 5 timestamp have marked down payrolls somewhat, but they still range around 175k, so there is reaction but not a panic economic downgrade. Citi is already at 160k. A number below 140k is weak, even taking into account recent information and would reinforce concern that economic slowing is for real.
In our overlay portfolio we have cut risk but not to the bone. Nevertheless, we are the least long risk we have been in many months. The short AUDCAD idea we put out yesterday is doing well (not as well as short risk outright but pretty respectable.) If there is a risk rout, the low liquidity European currencies are vulnerable as well. In the past we have seen that their positive long-term fundamentals do not generally outweigh positioning and liquidity, so they tend to underperform badly as well when risk is sold.
Net, net we remain concerned that investors are still positioned for a near-term bounce back in what might be a more fundamental pullback.

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PierreLegrand's picture
Beyond the Welfare State…Must Read

This article will become as influential as Angelo M. Codevilla’s article regarding the elite. It does worry me that if Codevilla is right then there will be problems trying to reform the behemoth that is the US Government. Mainly stemming from the fact, as outlined in, America’s Ruling Class — And the Perils of Revolution, that the elite, both republican and democratic elite, love the power of the welfare state. They have no incentive to repair it unless we force them. The amount of force that will be required is the question of the day. Still for the hopeful this is as good a way forward to reforming that monster we call the Federal Government as any I have read. Certainly better than the nonsense of nipping away at the margins that so many of the Republicans seem to be so enamored by.

malek's picture

Thanks for the link to that article with an excellent analysis portion!!
(It would be even better if not for associations to the false left-right-paradigm, and repeated "we can right the ship without touching existing beneficiaries," which are mathematically unsound and drift off into propaganda and political posturing.)

This paragraph rattled me:

Under the rules of the modern welfare state, we give up a portion of the capacity to provide for ourselves and in return are freed from a portion of the obligation to discipline ourselves. Increasing economic collectivism enables increasing moral individualism, both of which leave us with less responsibility, and therefore with less grounded and meaningful lives.

I had never before connected sweeping individualism to be a direct effect of the welfare state...

DavidC's picture

"The string of bad economic releases is consistent enough and bad enough that a weak NFP number tomorrow is risk off and USD positive".

I wonder if we could get to the stage where the Dollar is negative AND risk off - a double whammy in other words?