Nov NFP Sandy Hits a Cliff

The impact of Hurricane Sandy on US Nov jobs was surprisingly small (NFP +146K from 138k & Unemp rate at 7.7% from 7.9%) but the extent to which business shutdowns continue into December remains to be seen. The expectations element from the hurricane made the figures an undisputed positive, but the 305K decline in the labour force and the 49K in downward revisions over prior two NFP months may temper the level of optimism.

The Fed welcomes the 7.7% jobless rate (lowest since Dec 2008), but will not take any chances next week when it’s likely to maintain the $40bn in monthly purchases of agency MBS and renew its reinvestment in agency debt by an additional $45bn. This is especially as the uncertainty from Boener/Obama regarding the Fiscal Cliff is expected to reappear on a weekly basis.

In days like today, sharp favourable surprises in both NFP and US unemployment rate, the US dollar has usually outperformed, while equities ended giving up most of their gains later in the session. This is seen now in FX. A more straightforward story in FX is the broadening sell-off in the yen as it becomes the path of least resistance on a combination of risk-on positioning from NFP and ahead of Japan’s Dec 16 elections, which are widely expected to tip the LDP’s Shinzo Abe as the new PM – aiming for unlimited easing in monetary policy until inflation goes from negative to +2-3%.

EUR/USD Despite negative–looking momentum measures on the daily chart, both the weekly and monthly setups appear more consistently positive, thus, arguing for further pullback near the 1.2870-80 trendline support (from Nov 13) before fresh bids are re-established. We have seen such a formation back in August 9-10, when the pair consolidated for five sessions before mounting a 7% rally to 1.3170 in a matter of two weeks.

CAD is the strongest of the day after Canada’s stellar job report showed +59K from +1.8K, highest in eight months, with a decline in the unemployment rate to 7.2% from 7.4%, lowest in eight months. CAD adds further ground to earlier gains when the BoC reiterated its reference to withdrawing stimulus in this week’s rate decision. Yet, we expect the central bank to stand past due not only to the strong currency but also the emerging imbalances in personal debt, to which it had already started raising caution.

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