Thursday FX Interest Rate Monitor

A positive end to the calendar year in the form of lower claims for unemployment insurance has left the U.S. government bond market nursing losses as evidence mounts that it won’t just be champagne flowing into the New Year. The improving economic tone looks certain to improve in the first quarter of 2010 sending expectations higher for a change in the policy settings from the Fed. At this stage of the game there is little point in trying to assuage investors that the Fed won’t shift policy anytime soon – which it won’t. The bleeding wounds of capital losses on bonds are evidenced by a one month surge in yields in the last five weeks from 3.15% to 3.89%. Yields are ending the year within a single bad session of reaching the 4% peak witnessed mid-year when investors first panicked about a change of heart from the Fed.

With European markets already closed for New Year celebration there is a lack of newsworthy material and price action to report other than in the dollar complex.

Eurodollar futures – March t-notes made another lurch for the lows and are currently trading at 115-06 for a 3.87% yield. Eurodollar prices lurched lower by four to nine basis points across the curve with heavier losses at later maturities. The 432,000 initial claim data ran counter to the expected reading of 460,000, which would have been a rise on last week’s revised 454,000 claims. Next week will surely see weaker bond prices still as investors brace for the first reading for non-farm payrolls next Friday. After a staggering loss of just 11,000 jobs in the November report, analysts currently predict neither gains nor losses from next week’s report. Preparation for another sign of confidence for consumption will surely see yields reach 4% ahead of the report.

European short futures – The European short closed with minor losses of between three and five ticks.

British interest rate futures – March 10-year gilt futures rose sending yields down – this will most likely be reversed when markets open on Monday as investors react to heavy treasury market losses.

Australian rate futures –Aussie bonds rose sending yields down to end the year at 5.62%. Bill prices saw modest gains of about four ticks.

Canada’s 90-day BA’s – Both bills and bonds are lower in response to the decline in Eurodollar futures prices. The 10-year government bond rose two basis points to yield 3.63%.