Beware of Buy the Rumor Sell the Fact

The price action this week underscores our view that participants have unwound year-end developments. The euro has returned to back to the 200-day moving average it had been toying with until late Dec.

Perhaps even more illustrative of this point is that the weakest G10 currency in the last two weeks of December was sterling, which has been best performer against the dollar this week. Similarly the strongest currencies from mid-December were the antipodeans, yen and Swiss franc, which have been the poorer performers this week.

As an aside, the fact that both the high yielding Australian and New Zealand dollars have been moving in the same direction as the low yielding yen and Swiss franc for the past three weeks suggests traditional carry trade strategies are the not the main driver.

With the currencies unwinding the year-end moves, the risk appears to be increasing that there is a "buy the rumor sell the fact" type of trading after what is now nearly universally expected to be a strong US jobs report tomorrow. Part of the dollar's recovery in recent days appears to have been encouraged, if not fueled by the string of strong data. How many times can the market discount strong US economic data?

Even the more doom and gloom observers recognize the US economy has accelerated. Weekly initial jobless claims have have been trending lower, even if the sub-400k print in late December was skewed by the holidays and poor weather. Many participants appear to be waiting for the jobs data to get back involved. A strong jobs report may see them want to buy dollars in response, but that could very well run into the profit-taking by those, who have already sold the foreign currencies and bought the US dollar. At the same time, to be clear, the dollar pullback envisioned here we will embrace as a new buying opportunity.

The European Financial Stability Mechanism (EFSM, not the EFSF as we misstated yesterday) raised 5 bln euros yesterday in the first funds not as a bailout of Ireland, but to bailout out Ireland's creditors, as the Emerald Isle does not lower its debt burden one iota. To the contrary it will be paying about 5.5% for the money that the EFSM raised at 2.59%. The pricing of the bond was tight at 12 bp above the mid-swap rate and was in high demand. Reports indicate that Europeans themselves bought 3/4 of the offering, a triple A issue.

Central banks and other official accounts competed with the private sector and managed to take down 38.5%. Similarly, the EFSM and EFSF will raised at least 49 bln euro over this year and next and will compete on the margin for investors who may have bought other European sovereign bonds instead. It may seem ironic with the world awash in debt, but there is a shortage of risk-free assets. These bonds add to that supply.

The most important data today has been the was the dramatic decline in the UK service PMI. It unexpectedly fell below the 50 boom/bust level (49.7) for the first time since April 2009. It follows the disappointing construction sector report yesterday. Although sterling is trading inside yesterday's range, the report arrested the attempt to take sterling higher in response to the press report suggesting that the BOE's Sentance who has been advocated a rate hike could soon be joined by a couple of his colleagues, (Fisher and Bean). Using market-based indications, it appears that the market is pricing in a strong chance of a 25 bp rate hike by late this year.