• Home ::
• Fundamental ::
• Market View ::
• Daily Market Briefing

• Send
• Print
• Add To
• Rss

Daily Market Briefing

04936100-19c5-4760-aa27-63e67ccf8804

18

0

US Dollar: Why the Lack of Reaction to Friday's Dismal US Employment Data?

Mon, Nov 10 2008, 05:38 GMT
by Terri Belkas

DailyFX

- Euro, British Pound Consolidate Losses Post-Rate Cuts, But Long-Term Trends Remain Bearish

- Commodity Dollars Surge, Japanese Yen Slips as Volatility Cools

US Dollar: Why the Lack of Reaction to Friday’s Dismal US Employment Data?
The US dollar may have ended the day lower versus most of the majors, but the moves came primarily during the Asian and European trading sessions and were not necessarily the result of the abysmal US non-farm payrolls (NFPs) numbers released at 8:30 ET. In fact, though the announcement of NFPs initially sparked major volatility for the US dollar and led it slightly lower, trading eventually quieted down and the currency actually ended the day higher versus the euro and British Pound from the time of the release. Focusing on economic data, US NFPs fell negative for the tenth consecutive month in October by a whopping 240K, while the September reading was revised from -159K to -284K. In all, this brings the job loss tally for the 2008 calendar year to 1.179 million and has propelled the US unemployment rate to a 14-year high of 6.5 percent. These figures are disappointing in their own right and suggest that the economy at large is in trouble, which was only confirmed by Robert Hall, the economist who leads the NBER's business cycle dating committee, who said that the evidence of recession is "more than compelling" and that it was "conclusive" in his personal opinion.

Given the lack of reaction from the greenback, it’s fair to say that much of this gloomy data has already been priced in to the currency, and right now, the forex markets are more concerned with risk trends and the deteriorating fundamentals of Europe.
Looking ahead to next week, this is likely to remain the case but traders should still watch out for the big US event risk on Friday, when US Advance Retail Sales will be released and when Federal Reserve Chairman Bernanke will speak. Advance Retail Sales are expected to show that the index fell for the fourth month in a row in October, with consensus forecasts by Bloomberg News calling for a 2.0 percent decline. However, given the contraction in the International Council of Shopping Centers’ (ICSC) index for the first time since March 2008 and the plunge in consumer confidence to a record low, there’s quite a bit of downside risk for this particular Advance Retail Sales release. At the same time, Federal Reserve Chairman Ben Bernanke and European Central Bank President Jean-Claude Trichet are scheduled to speak at an ECB conference in Frankfurt. Comments by these two men tend to be extremely market-moving for not only currencies, but bonds and equities as well. If the central bank chiefs issue bearish rhetoric that spooks investors, the news could weigh heavily on carry trades and propel low-yielding currencies like the US dollar and Japanese yen higher.

Related Article: US Non-Farm Payrolls Fall 240K in October, Unemployment Rate Surges to 14 Year High, But What About the Dollar?

Euro, British Pound Consolidate Losses Post-Rate Cuts, But Long-Term Trends Remain Bearish
The euro and British pound both ended Friday marginally higher versus the US dollar, but the moves marked more of a consolidation rather than any sort of rebound. Indeed, the long-term outlook for pairs like EUR/USD and GBP/USD remains bearish as the European Central Bank and Bank of England are both very likely to cut rates aggressively over the next year. On the euro side, we’ve already seen the European Central Bank (ECB) cut rates by 50 basis points to a nearly 2-year low of 3.25 percent.
Furthermore, comments by ECB President Jean-Claude Trichet indicated that the central bank is starting to become concerned about the potential for deflation and that they would most likely cut rates again. This seems quite plausible, as growth and inflation pressures are bound to decrease further, and as of Friday’s close, Credit Suisse overnight index swaps were fully pricing in a 25 basis point cut in December.

On the British pound side, the Bank of England (BOE) unexpectedly slashed rates by 150 basis points on Thursday to bring the UK Bank Rate down to 3.00 percent, the lowest level since 1955. Meanwhile, the BOE’s Monetary Policy Committee (MPC) statement released post-announcement showed that the MPC is extremely concerned about not only the instability in the financial markets and persistently tight credit conditions, but also the significant downside risks to growth and perhaps most importantly, the risk that inflation will fall below their 2.0 percent target. The latest CPI figures show inflation growth at 5.2 percent in October, but given the economic slowdown and drop in commodity prices, the BOE has suggested that CPI will plummet in coming months. This makes the BOE’s Quarterly Inflation Report – which is due to be released on November 12 – all the more important, as it will either confirm or refute speculation that the central bank fears deflation. If the Inflation Report confirms this outlook, the news could trigger a large British pound sell-off as it will essentially guarantee further rate cuts. In fact, Credit Suisse overnight index swaps are fully pricing in a 25 basis point cut in December and 228 basis points worth of reductions during the next 12 months.

Related Article: Forex Market Impact Of European Central Bank And Bank Of England Rate Cuts

Commodity Dollars Surge, Japanese Yen Slips as Volatility Cools
Of the major currencies, the commodity dollars dominated the forex markets today as the Australian dollar, New Zealand dollar, and Canadian dollar all rose versus the low-yielding Japanese yen, as well as the US dollar. We’ve seen demand for carry trades pick up a bit as volatility cools down, as evidenced by the drop in the CBOE’s VIX index to 56.1 from 63.68 on Thursday and a closing record of 80.06 on October 27. Nevertheless, this index remains extremely high in a historical context, so caution should be had when it comes to buying carry trades and selling the Japanese yen. Focusing on the data on hand, the Canadian net employment change unexpectedly rose by 9.5K, as forecasts called for -10K. The Canadian dollar immediately jumped on the positive change, as it suggests that Canadian domestic demand will help the nation survive the global economic slowdown.

Looking at the Japanese yen in the long term, I think there’s still quite a bit of bullish potential. Keeping the inverse correlation between the US stock markets and Japanese yen in mind, we need to consider that while many governments have taken active steps to try to stabilize the financial markets, a global economic slowdown is bound to have a negative impact on corporate earnings going forward. As these figures are released, equity markets could fall even lower and take forex carry trades down with them. While I wouldn’t be surprised to see a bounce in these carry trades in coming weeks, the trend remains bearish and should ultimately continue to benefit the low-yielding Japanese yen.

Related Article: Euro / Yen Range and Eventual Breakout Trades

Published on  Mon, Nov 10 2008, 05:44 GMT