Afternoon Run … December 7, 2009

Key News

* Yen’s Biggest Drop in Decade No Anomaly With Options (Bloomberg)

* ECB Trichet: Stronger Asian Currencies Would Aid Global Econ (Market News Intl)

* U.S. Treasury Says TARP to Cost $200 Billion Less (Bloomberg)

* U.K. Bank Loan Write-Offs Hit Record Highs (WSJ)

The Event Agenda

dec 7 data Afternoon Run ... December 7, 2009

Afternoon Run-Down

Friday’s better than expected payroll number shifted the market’s focus. Perhaps the Fed’s first move on interest rates could be sooner than what has been communicated. At least that what’s traders started placing bets on … and that narrows interest rate differentials for the US v most of the world … and widens the differential between the U.S. and those countries that share zero interest rate policies.

The move in commodities showed the connection between sentiments about easy policy induced liquidity being put to work in commodities investments. When the prospects for U.S. rates nudged higher, commodities took a hit. Gold is down 7% in 3 days … crude oil is down 6% from its highs last week breaking down technically below $75.

The biggest loser on Friday in currencies was the yen. After getting a report that showed the National YOY CPI number was falling at a record pace, the BOJ went into an emergency meeting and came out announcing that they would be injecting more liquidity in the banking system. That widens the prospective liquidity gap between the U.S. and Japan per that announcement relative to the market response to the better U.S. employment data. That, in part, is why USD/JPY has rallied sharply off the Dubai scare-induced lows the day after Thanksgiving. The dollar rose 7% over the past six trading days against the yen.

The dips in the risk trade that have been bought so aggressively in recent months, will not likely find the same support going into year end. Buying a dip in December is not only a risk to performance but it’s a business risk for many managers. Don’t be surprised to see liquidity dry up sooner than normal this month (going into the holidays) and to see dramatic moves in currencies as a result.

We have four central bank meetings this week out of Canada, New Zealand, the UK and Switzerland. All will remain on hold on interest rates. New Zealand is expected to hold the line until late 2010. The confirmation of a cautious stance could put more pressure on Kiwi. Its Aussie counterpart has now hiked three times and the U.S. speculation from payrolls narrows the interest rate differential prospects with New Zealand. Other areas of interest will be the Bank of England’s outlook on their quantitative easing program and, for the SNB, their outlook on curbing strength in the Swiss franc.

Key Charts

The Nonfarm Payroll number on Friday showed the fewest job losses since December of 2007…

dec 7 payrolls Afternoon Run ... December 7, 2009

Interest rate expectations spiked 13 basis points following payrolls on Friday but are retracing this morning. The below chart is the June Eurodollar contract which prices market expectations for short term interest rates by June of 2010 (lower Eurodollar= higher rates)…

dec 7 eurodollars Afternoon Run ... December 7, 2009