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Forex: Dollar Takes A Free Fall On Disappointing Non-Farm Payrolls

DailyFX Forex Fundamentals 10-08-04

By Kathy Lien, Chief Strategist of

·Dollar Takes A Free Fall On Disappointing Non-Farm Payrolls
·Weaker German Industrial Production And Wider Current Account
·Japanese Yen Rises As China Reiterates Intention To Move To Flexible Currency
·Canadian Unemployment Rate Declines to 7.1%


The euro shot up over 200 pips today on a much weaker than expected US non-farm payrolls report. The US added 96k jobs in September, which pales in comparison to the market’s original 148k forecast. Payrolls in August were also revised downwards by 16k. The failure to sustain triple digit employment gains have been particularly damaging for the dollar. The manufacturing sector actually lost 18k jobs, which completely erases the gains made back in July and August. It is estimated that approximately 150k new jobs need to be created each month in order to accommodate the growing labor force and to keep the unemployment rate stable. We have not seen such levels of payroll growth since May. Since the recession began in 2001, the economy is still in a net debit of 925k jobs. What is even more alarming is that we have not seen an end to layoff announcements. AT&T was the latest to announce their plans to lay off 20% of their workforce (approx 7,400 jobs). This follows Bank of America’s announcement of approximately 4,500 job cuts. Therefore even though most firms are hiring, they are doing so on a very cautionary basis. If you add into the picture the uncertainty to corporations brought on by another record high in oil prices, then the near term outlook for payrolls is less encouraging. Meanwhile in the Eurozone, Germany released disappointing industrial production and trade data. Their trade balance shrunk from EUR13.6B to EUR11.1B while industrial production fell 1.0%. Exports decreased by –1.4%, which is actually pretty discouraging since the lack of domestic demand leaves Germany’s economy extremely dependent on foreign consumption.


The dollar took a free fall dive after the disappointing labor market data. We
touched on the absolute payrolls gain in our euro commentary, but will elaborate further on the details of the report here. Although the headline change in the report fell short of expectations, average weekly hours and annualized hourly earnings both edged higher, while the unemployment rate remained unchanged at 5.4%. The Bureau of Labor Statistics said that the hurricanes had a limited impact on payrolls, but we will have to wait for future revisions to September’s data for confirmation. Additionally, the BLS estimated that the benchmark revision of the data to March 2004 would be approximately +236k. This is less than the White House’s expected revision, but still significant. It adds about 19,500 jobs per month onto payrolls between April 2003 and March 2004. Overall, the latest payroll report should not change expectations for Fed tightening. That is, one more rate hike this year, which is likely to come in December. Federal Reserve President Stern and Poole confirmed this fact on the wires today, when they said that September payrolls “will not derail the Fed’s measured pace of raising rates.”


With no UK data released this morning, the British pound was driven higher by dollar weakness. As we mentioned in yesterday’s commentary, we need to look ahead to next week’s busy UK economic calendar for any possible self-directed movements in the pound. In the week ahead, we are scheduled to receive data on inflation, the trade balance, the labor market, as well as leading indicators. Inflation is expected to be higher across the board, which should not be surprising given rising energy costs. The labor market remains one of the strongest sectors of the UK economy. The number of unemployed individuals is expected to fall for the sixteenth consecutive month. The directional change in the trade balance though may be a bit of an unknown since the UK recently became a net oil importer. Higher oil prices could be reflected in the net value of their imports.


The dollar plummeted against the Japanese yen today as China reiterated their intentions to eventually move to a more flexible currency regime. As we have previously mentioned, currency flexibility by China is key in further yen gains. Japan competes fiercely with China on exports and it would be significantly yen positive if China allows their currency to gain in value. China currently artificially prevents their currency from accelerating beyond its specified trading band, making their goods more competitive than Japanese goods. Meanwhile economic data released overnight was mixed. Household spending increased a more than expected 0.6% while the more volatile machine orders fell short of expectations. The eco watchers survey also retraced below the key 50 level, indicating that workers with jobs that are sensitive to the business cycle, such as taxi and truck drivers, department store sales staff, and restaurant and shop owners felt that economic conditions worsened in the month of September. The more pessimistic outlook is likely linked back to oil prices.


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