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Daily Market Briefing

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Dollar Traders Prepare For The Worst Expected NFP Report In Over A Quarter Century

Fri, Dec 5 2008, 09:10 GMT
by John Kicklighter

DailyFX

- ECB Cuts 75bps And BoE Loosens By 100bps, Then Why Did The Euro And Pound Rally?

- Canadian Employment Report Should Not Be Overlooked With The Loonie Threatening Breakouts

Dollar Traders Gear Up For What Is Expected To Be The Worst NFP Report In Over A Quarter Century
It has been a fundamentally busy return to trading after last week’s extended holiday weekend in the US; but the greatest potential for event driven price action may come at the very end of the week. Tomorrow, the Bureau of Labor Statistics will release its non-farm payrolls (NFP) survey for November. For the past six to eight months, this indicator has generated relatively little volatility – at least compared to the typical reaction to the monthly report in previous years. This dampened response is due largely to the development of a global recession and financial crisis that have given the currency a greater purpose in the international markets: as a safe haven. However, a global drop in interest rates and the introduction of massive stimulus packages around the world have helped to cultivate a sense of stability in the markets over the past month. Now, another major fundamental driver will need to fill the void left by deleveraging and interest rate speculation.

This is where growth will come in. As risk appetite slowly returns, speculation will turn to forecasting which economy will hit bottom first and with the least damage before pacing the eventual global recovery. Employment will be a key gauge for the dollar in this race as it is one of the most prominent leading indicators and characterizes the health of consumer spending - the biggest component of growth. That being said, if forecasts for a 333,000-person drop in national payrolls come to fruition, then the bottom in the US recession will likely be a long ways off. This would be the largest drop in employment in nearly four decades, which is further expected to boost the jobless rate to a 15-year high 6.8 percent. Supplementary labor data released over the past week certainly supports such dour expectations. Today’s continuing jobless claims report for the week ending November 22nd ballooned to 4.09 million Americans – the most in 26 years. Add to that, a record drop in the employment component for the ISM services report and the largest contraction in ADP private payrolls since November of 2001 and not only is there evidence for a sharp contraction in November, but there is enough data to suggest employment will slide at such as pace for months to come.

Related Articles: US Dollar: Non-Farm Payrolls(NFPs) May Fall by the Most Since 1982

ECB Cuts 75bps And BoE Loosens Rates By 100bps, Then Why Did The Euro And Pound Rally?
European policy makers made another coordinated rate cut today. Not only did the European Central Bank (ECB) and Bank of England (BoE) lower their respective benchmark lending rates, but the Swedish Riksbank slashed its primary rate by 175 basis points (bps) while the Danish central bank eased by 75 basis points. Looking at the bigger picture, the consistency in these large reductions points to the quickly fading health of the regional economy. However, currency traders were more concerned with the individual efforts made by the BoE and ECB. The Monetary Policy Committee (MPC) announced its decision first; and the 100 bps cut – though a sharp drop – came as little surprise. Economists’ forecasts had pegged this full percentage point easing and traders were perhaps expecting a slightly larger one to follow the 150 bps drop last month. This was the primary reason GBPUSD was able to recovery from a test of a six-year low marked just before the announcement. Nonetheless, this sharp contraction has brought the UK’s overnight rate to 2.00 percent – its lowest level in 52 years. What’s more, there was little in the statement, that accompanied the announcement, that would suggest the central bank plans to stop anytime soon. Comments to consumer spending and business investment, subdued wage growth, and “substantial risk of undershooting the 2 percent CPI inflation target” mirror sentiment from previous meetings and statements. This should remind us of the question posed to BoE Governor Mervyn King last week of the potential for lending rates to eventually reaching zero, which he suggested was a possibility.

A little latter in the day, the ECB delivered the more surprising rate decision. Though President Jean Claude Trichet and his fellow board member would not match the BoE’s move, the 75 bps cut was more aggressive than the official forecast was calling for and the single largest reduction in the central bank’s short, 10-year history. Here too though, market participants were expecting more considering the data that has crossed the wires over the past weeks. Just last week, the November reading for Euro Zone CPI plunged from 3.2 percent to 2.1 percent – the largest monthly change to the year-over-year figure in nearly 20 years and one that would bring the key gauge quickly back to the policy authority’s target rate. In respects to inflation, the central bank forecasted a 1.4 percent pace of price growth through next year and 1.8 percent in 2010. This is certainly a big shift considering the ECB held back from easing its own lending rates for so long due to concerns over inflation. This no doubt has allowed Trichet and crew to turn their focus on troubles in growth and the financial markets. Noting that the decision was reached by “consensus” and Trichet was talking about alternatives to stabilizing credit, the door is left wide open for further cuts.

Related Articles: ECB Cuts Rates by 75 bps - EUR/USD Forecast For 2009

Canadian Employment Report Should Not Be Overlooked With The Loonie Threatening Breakouts
For event-risk traders, Friday’s US non-farm payrolls report promises to be one of the greatest market moving indicators we have seen in weeks; but will it be the biggest? Canada is scheduled to release its own labour report at 12:00 GMT; and the official consensus is relatively reserved. Whereas conservative estimates are already pricing in the biggest drop in US payrolls in nearly a quarter of a century, the official consensus for Canadian employment is calling for a relatively modest 25,000-person drop. Put into historical context, this would be the first contraction in four months; but it is still less than half the 55,000 loss in July. Therefore, there is plenty of room for surprise. Like it is with the US, employment in Canada will increasingly be seen as a leading gauge for economic health. And, considering Canada is seen as one of the strongest economies in this global recession, any blows to this foundation could severely alter the loonie’s direction – a dangerous proposition considering so many Canadian dollar-denominated crosses are positioned for breakouts.

Related Article: Canadian Manufacturing Marks Its Fastest Contraction On Record

Published on  Fri, Dec 5 2008, 09:16 GMT