World Market Update - North America

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World Market Update January 5, 2011 » A North American Market Perspective by Western Union

US Employment Jumps, Will Friday's Reading Confirm? Market Highlights: Risk Aversion Flares to Start The New Year ADP payrolls jump in December North American currencies strong Risk Aversion Flares to Start The New Year The risk tone has started the year with a decidedly negative tone after the run up which occurred over the thinly traded holiday season. The Fed's comments yesterday were not viewed positively in the market; the Fed will not be deviating from its substantial stimulus programs until there is a stronger recovery apparent. Furthering the mood, stocks overnight fell in Asia due to rumours that China may levy a new tax on those with multiple homes or large estates. As we saw more and more in 2010, and undoubtedly will in 2011, what happens in China is eyed closely by the world and risk appetite, along with all markets, are affected by Chinese news. Also creating a stir, Chinese officials also noted that their buying of Spanish bonds would have to depend on market conditions, thereby stating their concern with the sovereign debt of the nation and non-unconditional support for their ability to repay the debt. In Europe, risk continued to trade heavy as headlines surface that the Swiss National Bank (SNB) will no longer accept Irish bonds as collateral. As we have said time and time again, it just doesn't quite feel like the European debt situation is quite flushed out, and it will likely continue to be a major theme for at least the first half of 2011. The reality is, there are problems out there, but they can be contained with a generally risk accepting market (which has been the case in 2010), but if there are any negative shocks on the horizon we would first see the debt situation deteriorate and that could trigger a more widespread financial meltdown.  ADP Payrolls Jump in December The ADP payroll numbers were released this morning and provided quite a nice surprise to the market. Although we await the much more comprehensive NFP reading on Friday (along with Canadian employment), and the December report can be discounted for seasonal factors, it was a shock to see US private employers add 297,000 jobs in December vs. a revised gain of 92,000 in November. Median guesses had the figure to be around 100,000, so there is cautious optimism for Friday's reading. With over 15million US workers jobless, we need to start seeing some consistent job gains to signal a recovery which will filter down to GDP and inflation numbers, and at some point the stimulus and spending will have to be scaled back which puts heightened importance on seeing some positivity in the short term.   North American currencies strong The heavy risk tone impacted equities as indices traded marginally red during the Asian session, and turned more negative in Europe. However, the release of the ADP number may turn the tide for NA, if traders view it more strongly than the overnight news. However, currencies took a more divergent approach overnight. Broadly, the US Dollar was stronger, particularly making gains against the EUR, CHF, and JPY. The CHF especially was overbought and with any sustained risk aversion will continue to fall against the dollar as trader's square positions and take profits. The EUR has pulled back considerably from December highs as much the risk aversion story seems to be focused around Europe. The fundamental and technical backdrop is making the EUR a tough buy at these levels (although things could turn around quite quickly). The big gainer on the day was the Canadian dollar. After losing steam yesterday when liquidity returned, it has outperformed virtually every major currency today. Producer prices are on the rise, as evidenced by a stronger than expected reading this morning, but the largest cues were taken from the ADP report out of the states. The North American story is that if the US is recovering, Canada will support the efforts and saddle up for the ride. Trading around parity, there is still a buy Canada feel although shorter term risks remain to the topside for USDCAD. That being said, the downward trend is still very much intact and many would not be surprised if we made another push well over par (CAD) in the early stages of 2011. Have a good day. By Tyson Wright, Senior FX Trader Send a message Contact us today. Email or call 1.888.987.7612 517 Fort St. Victoria, BC V8W 1E7

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