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The US dollar see−sawed its way through a poor employment report

Mon, Oct 6 2008, 08:57 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

News and views

The US dollar see-sawed its way through a poor employment report and a volatile equity market transfixed with the financial bailout House vote, finally emerging a little firmer. The weak NFP data produced USD selling initially but within minutes it was overwhelmed by dollar demand. In similarly curious price action, the DJIA traded up >300pts at its highs but started to fall after the House passed the hoped-for legislation and finished -157pts. This sell-off stoked safe haven dollar demand into the NY close. NZD/USD chopped around within a 100 point range, finishing a little lower as risk aversion ticked back up, at 0.6615.

AUD/USD whipped around from the low 0.77s to the low 0.78s, with little apparent support from a rally in most metals prices on LME.

EUR/USD sellers appeared to be waiting for the post-NFP bounce as they drove it to its 1.3703 lows against a backdrop of concerns over European banks and in the wake of dovish ECB commentary that has caused many forecasters to change their views. A later squeeze to 1.3900 was rebuffed, the euro finishing around 1.3770.

USD/JPY dipped to 104.53 post-payrolls, roared back to a 106.15 high but the sagging Dow pulled it back to 105.30.

US payrolls jobs fall 159k in Sep. The payrolls report was weak from all perspectives. The 159k drop in payroll jobs was the steepest yet this cycle, and the household survey jobs decline of 222k was the fifth in a row, unusual for this typically volatile part of the report. The unemployment rate edged up slightly in Sep but steady at 6.1% after rounding. Hourly earnings grew just 0.2%, its slowest pace in five months, and hours worked fell 0.5%, which points to household income growth stalling or declining in September. As in July and August, every industry sector except for education/health and government recorded declines, indicating that we are seeing a broad-based deterioration in the job market.

US non-manufacturing ISM 50.2 in Sep, showing only modest slippage. It averaged 50.1 in Q3, down from 50.6 in Q2, so the slowdown so apparent in the September factory ISM (43.5) has not showed up, yet, in this measure of the tertiary sectors of the economy.

Euroland services PMI was revised up by 0.2 pts to 48.4 in Sep, confirming a full quarter of services sector contraction, even despite modest growth in retail sales in the first two months of Q3.

UK services PMI slumped to 46.0 in Sep, its lowest in the twelve year history of the series. Along with very weak factory and construction PMIs, this confirms that the UK economy has entered a period of recession. Separately, the Bank of England reported the first negative mortgage equity withdrawal for the decade, of –£2.8bn in Q2. That compares to more than £17bn of MEW per quarter at the peak in 2003 and over £10bn just a year ago in Q3 2007. This is a further consequence of the freezing up of credit markets and the collapse of house prices, and emphasises the pressures on the UK household sector.

Outlook

A reluctance to enter fresh trades in the current volatile environment appears to be helping NZD somewhat but we suspect that data revealing another weak quarter in Q3 will leave the kiwi vulnerable to selling on key crosses in coming days and weeks.

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Published on  Mon, Oct 6 2008, 09:00 GMT