US Govt Tops Off NFP Rout With Huge Lawsuit

As if the jobs report wasn’t bad enough, the US government topped off a tough day on markets by announcing enormous mortgage security lawsuits against financial companies. On the day, CHF and GBP led while the commodity currencies lagged. Friday's CFTC data showed CAD and AUD longs expanding while EUR and GBP positions falling. Our weekly analysis is below.

Non-farm payroll posted a reading of zero on August, missing the +68K estimate. It was the weakest jobs report in 11 months and there was no silver lining as downward revisions to June and July data trimmed another 58K jobs. Private sector employment increased 17K compared to the 95K expected and the unemployment rate remained at 9.1%.

NFP was the first data point of August not based on surveys and it points to an economy that's in danger of falling into recession. Market are increasingly betting on the announcement of Operation Twist at the FOMC on Sept. 21. The move is a maturity swap using the funds from QE1 and 2. It's not QE3 and it will provide only a mild stimulus but it's a step closer to true QE3 and that's what triggered a rally in CHF and precious metals on Friday. Gold surged $52, or 2.9%, to $1881. Silver gained 4.3% to $43.30.

Risk assets sold off with the S&P500 falling 2.5% to 1174. US 10-year yield fell 13 basis points to close the week at a 60-year low of 2.00%. Greek two-year notes hit an obscene yield of 79% dashing hopes Greece could return to borrowing markets next year or two.

Bank of America led an 8% drop in financials on reports that the FHFA – the US government agency that supervises Fannie Mae and Freddie Mac -- was preparing to sue many large banks over mortgage security fraud. The announcement came after the stock market close and included 17 banks (in the US and overseas). The numbers continue to leak out but appear to be in excess of $30 billion. Shares of financials were flat after hours, hinting that the lawsuit numbers were close to expectations.

Weekly Charts

On the week, EUR and GBP lagged while CHF and NZD led. The euro finally broke out of its slumber on the weekly chart to post a bearish outside reversal. Cable bounced before reaching the early Aug lows but support at 1.61 will be key. The rebound in USD/CHF looks very precarious but may have been salvaged by the late day rally on Friday.

Commitment of Traders

- JPY longs fell to 41K from 47K

- EUR fell to a net short position of -0.3K from +2.5K

- GBP fell to +0.4K from 10.9K

- CAD longs increased to 14K from 8.8K.

- AUD longs expanded to 47.6K from 43.6K

- NZD and CHF longs were virtually unchanged.