• Is the EUR/USD Rally Sustainable?
  • Dollar Soars as Jobless Rate Drops Below 8%
  • GBP: Waiting for the BoE to Ease
  • CAD: Another Hot Employment Report
  • AUD: Ends the Week As Worst Performing Currency
  • NZD: Oil Down 2%, Crazy Volatility
  • JPY: BoJ Leaves Policy Unchanged

  

Is the EUR/USD Rally Sustainable?

The euro recovered nicely against the U.S. dollar this week, rising 4 out of the last 5 trading days.  Better than expected U.S. economic data, ECB President Draghi's steadfast defense of OMT, reassurance of progress in Spain and Portugal along with Moody's Spanish rate decision delay has spared the euro from more pain.  This past week was all about an improvement in risk appetite that is best seen through the Dow Jones Industrial Average, which climbed to a new 4 year high. The EUR/USD's break above 1.30 is psychologically significant and now many traders are wondering how much further the euro can rise.  Fading a move as strong as the one that we seen over the past 48 hours is always tricky especially when it is supported by economic data.  Unfortunately the support is from better data out of the U.S. and not Europe.

As ECB President Draghi warned on Thursday, disappointing economic data and heightened uncertainty leaves the risks for the Eurozone economy to the downside.  Problems in Greece and Spain still pose a threat to the region and we don't expect much progress next week.  On Monday, the European Stability Mechanism or the Eurozone's permanent rescue fund will be officially launched.  The first job of the 500 billion euro fund is to lend money to Spain for its bank recapitalization program.  A discussion about offering the country a precautionary credit line to cover the issuance of bonds with first loss guarantees, something that Spain is considering could also be discussed.  Unfortunately no decisions will be made on Greece at the Eurozone Finance Ministers meeting next week because Greek officials and the Troika are still bumping heads on reforms that would unlock their next tranche of aid.  According to Prime Minister Samaras, Greece is running out of time and will be bankrupt by the end of November if they do not receive international aid.  The problem is so severe that German Chancellor Merkel will be making her first trip in 5 years to Athens to assess the situation and show her support.  With both Greece and Spain most likely needing more money, it is hard to believe that this EUR/USD rally can last.  Yet there's not much on the Eurozone or U.S. economic calendar next week to threaten the rally.  Technically, the 1.3171 September high in the EUR/USD is major resistance and a break above that point would be needed to break the EUR/USD out of its recent consolidative mode.  However if the currency pair breaks below 1.29 first, then the door is open to further losses.

 

Dollar Soars as Jobless Rate Drops Below 8%

The Federal Reserve can breathe a sigh of relief after seeing this morning's non-farm payrolls report. While 114k jobs were created in the month of September, 46k more jobs were added to August payrolls (bumping it up from 96k to 142k) and more importantly, the unemployment rate dropped from 8.1 to 7.8%.  This is the first time in more than 3.5 years (almost a full Obama term) that the jobless rate fell below 8%. President Obama's chances of reelection soared with today's labor market report - he can now say that the unemployment rate is lower than when he took office.  Obama "owned" the U.S. economy in January 20, 2009 and the first unemployment report he was responsible for was February 2009 and that month, the jobless rate was 8.3%.  Throughout his term, the rate never dropped below 8% until now.  Yet while we are happy to see the improvement in the household survey, we cannot ignore the fact that the household survey and the establishment survey are painting completely different pictures of the U.S. labor market.  The household survey, which calculates the unemployment rate, has shown a dramatic improvement while the establishment survey, which provides non-farm payrolls continues to report sluggish job growth.   The difference is labor market participation, which is captured by the household survey.  More people are finding part time work, are self-employed or contractors working at home and this is confirmed by the steady U-6 unemployment rate.  Even though fewer jobs were created in September compared to August, the rise in non-farm payrolls was still better than many investors had anticipated. Going into the NFP release, the market had been bracing for the worst but with payrolls coming in line with expectations, investors quickly turned to the other labor market numbers.  Aside from the sharp improvement in the unemployment rate, average hourly earnings and average weekly hours also increased.  The only bad news was in the manufacturing sector, which shed jobs for the second month in a row.  It is far too early to tell whether these improvements are sustainable and the central bank has already pledged to keep monetary policy easy even after the U.S. economy recovers. The U.S. calendar is light next week with only the Beige Book report, trade balance, producer prices and University of Michigan Consumer Sentiment Index scheduled for release.

 

GBP: Waiting for the BoE to Ease

The lack of U.K. economic data did not stop the British Pound from selling off against all of the major currencies.  The positive response to ECB President Draghi's speech on Thursday and U.S. non-farm payrolls report Friday made sterling appear less attractive compared to the euro and U.S. dollar.  It is widely believed that the Bank of England will be the next one to ease.  Although the monetary policy committee kept interest rates and the size of their asset purchase program unchanged this week, signs of slower growth across the economy could push the central bank into action next month.  While investors have already priced in easy monetary policy in the U.S. and Eurozone, not everyone is prepared for the BoE to ease in November.  The decline in manufacturing and service sector activity has already prompted some traders to consider a larger asset purchase program but it may take the MPC minutes to push everyone over the edge. Either way, the risk for sterling is to the downside.  Industrial production and trade numbers are due for release next week.

 

CAD: Another Hot Employment Report

Another month of strong job growth drove the Canadian dollar sharply higher against all of the major currencies.  Last month, more than 52k jobs were created in Canada, 5 times greater than expectations and the equivalent of 487k American jobs.  Nearly all of the increase was in full time work, which is the healthiest type of job growth the country could ask for.  The unemployment rate increased from 7.3 to 7.4% but this was largely due to an increase in the participation rate.  It is hard to question the hawkishness of the Bank of Canada when you look at these employment numbers.  The labor market is strong and if this trend continues, then maybe there is justification for tighter monetary policy.  Canadian trade numbers are scheduled for release next week the market is looking for a continuation of good numbers.  The Australian and New Zealand dollars on the other hand fell sharply against the greenback.  In fact hands down, the Aussie is this week's worst performing currency.  A 25bp rate cut and weaker economic data out of Australia and China was just too much for currency to handle.  Hopefully the rate cut will help to support employment growth and turn things around for Australia's economy.  Unfortunately more may need to be done with the PMI Construction report also tumbling in the month of September.  According to Housing Industry Association Chief Economist Harley Dale said, "The Australian PCI update for September provides further evidence that residential construction is the weakest sector of the Australian economy. The first September 2012 update available for Australia's construction industry supports not only the October rate cut decision, but the requirement for the follow-up move in November."  No major New Zealand economic reports are due for release next week but Australia has employment numbers on the calendar.

 

JPY: BoJ Leaves Policy Unchanged

It was a mixed day for the Japanese Yen which traded lower against the euro, Swiss Franc, U.S. and Canadian dollars and higher against the British pound, Australian and New Zealand dollars. As expected, the Bank of Japan left monetary policy unchanged.  According to our colleague Boris Schlossberg, the BoJ "acknowledged that the export sector was under pressure, but also noted that domestic demand has remained relatively firm. In its monthly report, the BOJ stated, "Japan's economic activity is leveling off more or less. Exports and industrial production have been relatively weak as overseas economies have moved somewhat deeper into the deceleration phase. On the other hand, domestic demand has been resilient, mainly supported by reconstruction-related demand. Specifically, public investment has continued to increase, and housing investment has generally been picking up. Private consumption has been resilient with the employment situation on an improving trend. As for business sentiment, firms have turned somewhat cautious mainly against the background of the deceleration in overseas economies."  Looking ahead, the BOJ noted that risks to growth remain high with uncertainty surrounding, "the prospects for the European debt problem, the momentum toward recovery for the U.S. economy, and the likelihood of emerging and commodity-exporting economies simultaneously achieving price stability and economic growth. Furthermore, attention should be paid to the effects of financial and foreign exchange market developments on economic activity and prices." The BoJ still needs to do more but having just increased asset purchases last month, they need to give the Quantitative Easing time to work its way through the economy.