Global Briefing: Look for Brazil-IMF Deal to Steal Jobs Data's Thunder

Developments in Brazil and Japan may lead trading today.
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U.S. jobs data, usually the markets' unrivaled focus on the first Friday of each month, may be overshadowed by developments in Brazil and Japan.

Brazil and the

IMF

have struck a new accord under which the South American nation will rely on interest rates to keep inflation below 10% and cut the budget deficit by another 8 billion reals. For its part, the IMF will decide the next tranche of aid in early March (rather than late February, as previously expected).

In Japan, government bonds reversed yesterday's gains. The yield on the 10-year benchmark bond rose 20 basis points to 2.375%. Earlier this week, a Japanese financial paper reported the large city banks were looking at an unrealized loss of around 370 billion yen if bond yields rose to 2.40%. Such sizable losses on top of their already weak balance sheets and need to write off more bad loans next month may go a long way toward explaining the talk of increased repatriation efforts.

Today's slide in bond prices reflected fading hopes that the

BOJ

would buy new bonds directly from the

Ministry of Finance

. In addition to Finance Minister

Miyazawa

repeating his opposition to such plans, the BOJ conducted its rinban operation (like a coupon pass in which the central bank buys bonds back from private sector) and disappointed those hoping for a larger-than-normal purchase. The BOJ typically buys 200 billion yen of bonds in such an operations twice a month.

Since the Tokyo close, Japanese government bond futures trading in London have stabilized following indications from Miyazawa that he wants to curb the rise in long-term yields, but not at the expense of the independence of the Bank of Japan. Instead, he suggested that the government should alter the ratio of long- and short-term instruments it holds.

The dollar initially set a new three-week low against the yen in Tokyo; but like Japanese bonds, it is also recovering in Europe.

No intervention was reported, but the Ministry of Finance's

Kuroda

continued to threaten "appropriate action" to stabilize the yen. There is also some speculation that the BOJ could cut interest rates. After dipping below the 111.35 level against the yen, the dollar recovered back to the 113 area. A move above 114 now is required to raise confidence that some sort of low is in place.

The dollar is recouping yesterday's losses against the euro. A stronger-than-expected U.S. jobs report today could send the euro toward the $1.1250 area it visited briefly yesterday. Although some observers have warned that the new

European Central Bank

might not be too happy with the euro's weakness, there is scant evidence. The ECB president,

Wim Duisenberg

, clearly stated today that he was not concerned. Because the ECB has no track record to speak of and its deliberations are secret, it is unclear how it will weight various factors in the policy making equation. Many

German workers are in the middle of a wage round and officials have expressed concern over large pay increases. Also, eurozone M3 money supply growth at 4.7% is above the ECB's 4.5% target. The euro's weakness, not only against the dollar, but also regional currencies and the yen, is tantamount to some easing of monetary policy.

European bourses opened sharply lower following the selloff in the U.S. yesterday and Asia earlier today. However, before midday in London, the major indices were trying to turn higher on the day.

The consensus calls for a 130,000-140,000-job rise in January's U.S. nonfarm payrolls.

The market has systematically underestimated the strength of the U.S. economy. In response to a stronger-than-expected December jobs report, the euro slipped almost 2 cents against the dollar. A much stronger than expected number this time, say around 200,000, would likely intensify speculation that the

Federal Reserve

may contemplate tightening monetary policy. The June eurodollar futures contract is just above critical support near 94.93. A break of this area, perhaps triggered by the jobs data, could trigger a 10-20 point slide over the next couple of sessions. The long end of the curve is also vulnerable. A convincing break of the 124 area, basis the March contract, would open the door to another 2-point slide.

Given the supply of corporate and agency issuance, it may be difficult for U.S. bonds to stage a strong rally, even if the jobs data is soft, ahead of next week's quarterly refunding. Supply should be a short-term issue as next quarter the federal government is expected to make a huge pay-down.

The Canadian dollar enjoyed its largest one-day jump in four months yesterday and is extending those gains today.

Like Mexico, having special access to the U.S. market through NAFTA insulates Canada from some of the vagaries of the international economy. The U.K.'s rate cut yesterday underscores the attractiveness of Canada's high short-term interest rates.

After another U.K. rate cut, which is currently being priced in, Canada will have the highest-yielding debt in the

G7

. The U.S. dollar has fallen through key support seen near C$1.4950. The next target is near C$1.4750. On a longer-term view, there is potential toward C$1.43.

With today's gains the Australian dollar has risen for five consecutive sessions. The Treasury's optimistic assessment of fourth-quarter growth helped push the Aussie through the key 0.6500-to-the-U.S. dollar area. A weekly close above 0.6530 could signal a medium-term move toward 0.6850.

Marc Chandler is an independent global markets strategist. At the time of publication, he held no positions in the currencies or instruments discussed in this column, though positions may change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column by sending a letter to mchandler@erols.com.