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USD bounced on the milder than expected fall in employment in July

Mon, Aug 4 2008, 06:36 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

News and views

USD bounced on the milder than expected fall in employment in July (-51K) but struggled to maintain its positive tone, with equities weaker, oil higher and focus on the higher than expected unemployment rate (5.7%, highest since Jan 2004). General Motors dragged down the DJIA with its -7.6% after reporting a hefty $15.5bn Q2 loss. NYMEX crude oil jumped about $4.50/bbl to highs above $128 on assorted opinion pieces on Israel-Iran tensions and short-covering but closed around $125. The New Zealand dollar fell about 40 pips to its intra-day low of 0.7246 but overall closed little changed vs USD.

The Australian dollar was firmly out of favour as RBA rate cut fever continued to rage, with the US payrolls number accounting for only about 20-25pts of AUD/USD’s 70 pip loss vs the local close, to lows not seen since 2 May.

The euro dropped from 1.5580/85 vs USD to a (fleeting) 1.5514 low on the payrolls headlines but late recovered as oil bounced and closed around 1.5565.

USD/JPY was choppy but mostly bid, despite the US equity losses.

US payrolls down 51k in July. The payrolls decline was, after upward revisions worth 26k to May and June, broadly in line with the 3 month average decline of 50k, compared to an average loss of 79k in the three months to April. That slower pace of job loss is consistent with the modest pick-up in GDP growth in Q2. Note that the upward revisions were to government jobs (+37k); private sector payrolls were revised down by 11k in May-June. The report included the normally volatile household survey which showed its third consecutive jobs decline which, coupled with a bounce in labour force participation, was enough to push the jobless rate from 5.5% to 5.7%. The industry detail in the report showed broad-based job losses.

US ISM came in at exactly 50 in July which indicates stalled but not weaker factory activity. There was a further rise in output and a probably rogue jump in the jobs measure, but these were offset by sharply lower new orders and a steeper than usual fall in the July exports number (which is not seasonally adjusted). These last two factors are not helpful for the growth outlook.

US construction spending continues to weaken, falling 0.4% in June due to ongoing decline in the residential sector.

The Euroland factory PMI was revised down by 0.1 to 47.4 in July, confirming that Euroland industry entered the second half of 2008 in weaker shape than earlier in the year. Similarly, the steep 1.4% fall in German retail sales in June points to weaker consumer spending in Euroland’s largest member economy; in annual terms, sales are down 3.9% yr.

UK factory PMI 44.3 in July. The factory PMI slumped to its lowest since late 1998 in July, adding to the mountain of evidence that suggests the UK economy is entering recession.

Outlook

We continue to like NZD lower multi week especially on a TWI basis. Rate cutting cycles from the US Federal Reserve, Bank of England and Bank of Canada over the past 12 months have shown that currencies typically continue to decline through the cycle, despite a market already expecting the future cuts to come.

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Published on  Mon, Aug 4 2008, 06:40 GMT