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Thursday June 5, 2008 - 23:00:25 GMT

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Forex Research - US Dollar Stumbles Ahead of Non-Farm Payrolls - Could They Fall By 100K?


• Euro Surges As ECB’s Trichet Indicates They May Be Hawkish Enough To Hike in July
• Pound Recovers Early Morning Losses After BoE Keeps Rates Steady

US Dollar Stumbles Ahead of Non-Farm Payrolls – Could They Fall By 100K?
The US dollar fell against many of the majors including the euro and British pound, but the move was driven primarily by European fundamentals rather than those out of the US. While we did see initial jobless claims surprisingly improve to 357K from 375K, this is not enough to suggest that Friday’s US non-farm payrolls report will be similarly strong. In fact, looking at 10 pieces of economic data that we use as leading indicators for non-farm payrolls, 8 of them indicate that the economy did indeed lose a substantial amount of jobs during the month of May. Currently, a Bloomberg News polls of economists shows that consensus estimates are for a drop of 60K, which would mark the fifth consecutive month of job losses. However, as we discuss in our NFP Preview, in each of the last 3 recessions – which we believe we may facing – there was a string of job losses that lasted for a minimum of 10 months, and the largest single month job loss was more than 300K!  In this context, a 100K drop over the next few months is not only possible, but probable. Regardless of how payrolls fare, the news is likely to spark significant volatility, as we have found it to be the most market-moving indicator for the US dollar. The question is: just how bearish of a sign will it be for the US economy? According to the Fed’s Flow of Funds report, household net worth in Q1 fell by $1.7 trillion from Q4, marking the second straight contraction and the sharpest decline in over five years. The drop was led by a plunge in real estate-related assets, which fell by the most since record-keeping began in 1952. With labor market conditions deteriorating rapidly and household wealth diminishing, there is very little impetus for consumer spending to help fuel expansion in the US, and thus, prospects for the economy remain bleak.

Euro Surges As ECB’s Trichet Indicates They May Be Hawkish Enough To Hike in July
The euro surged nearly 200 points against the greenback on Thursday as European Central Bank President Jean-Claude Trichet indicated that rate cuts were off the table, and in fact, a rate hike was possible as soon as next month. The ECB’s decision to leave rates steady at 4.00 percent was in line with expectations, but the markets were shocked when Mr. Trichet said during his monthly press conference that some council members actually wanted to raise rates this month, and went so far as to say that there is potential for the central bank to raise rates next month. Furthermore, despite recent declines in various measures of Euro-zone services and manufacturing sector growth, Mr. Trichet called the economic fundamentals "sound." In fact, the ECB is a bit more optimistic on economic prospects for the region, as 2008 growth forecasts were revised up to 1.5% - 2.1%, from 1.3% - 2.1%. Meanwhile, he said in a speech that "risks to price stability have increased further" and that the ECB is in a state of "heightened alertness," which is a new phrase that we haven't seen in his commentary. Overall, it is clear that the ECB has absolutely no intention of cutting rates this year, and in fact, there is greater potential that because the bank's primary mandate is to focus on price stability, they may actually hike by 25bps next month to 4.25%.

Pound Recovers Early Morning Losses After BoE Keeps Rates Steady
The British pound has been on the ropes all week long; but today’s price action may denote a tentative easing in bearish projections. Heading into the Thursday session, which happened to contain the most highly anticipated piece of UK event risk for the trading week, the market had already pushed the currency over 250-points below from the week’s open. Consistent disappointments in the consumer confidence, manufacturing and services activity and housing sector activity indicators crossing the wires had already seeded bearish sentiment among pound traders. In the end, it was this dour setting that led the pound to regain its footing on an otherwise uneventful BoE rate decision. As was expected by economists and interest rate markets, the Monetary Policy Committee voted to leave the benchmark lending rate at 5.00 percent for the second consecutive meeting. Nevertheless, with headline inflation at 3.0 percent, many believe BoE Governor King and his colleagues will likely allow a period of weak growth in order to bring interest rates back within means. Indeed, interest rate markets are actually pricing in a rate hike later in the year.

Commodity Dollars: Australian Dollar Maintained By Trade, Event Risk Gets Heavy For The Loonie
Momentum sustained most of the commodity pairs through Thursday. The kiwi dollar was by far the biggest mover for the day after RBNZ Governor Bollard forecasted New Zealand’s first rate cut sometime this year. Australia’s currency saw high volatility - yet no direction - once again. The April trade deficit contracted to A$957 million for the smallest short-fall in 14 months. This positive change was accomplished through a 2.2 percent drop in imports and the largest jump in exports in nearly two years - altogether helping to validate the RBA’s forecast for terms of trade to grow 20 percent this year. Finally, the top event risk came from Canada. The May Ivey PMI and April building permits both hit 11-month highs, though both were undercut in their respective breakdowns. Tomorrow’s jobs report will be a top market mover.

Japanese On The Cusp Of A Breakout With Volatility Ahead
Against its US counterpart, the Japanese yen has been brought up to a significant make or break level. Closing the day just below the 106 level, USDJPY is within stone’s throw of a year-old downward sloping trendline that marks the boundary of the dominate trend for many traders. Looking across the other majors however, this same tension isn’t felt - reflecting a settled interest in risk trends. Today’s event risk contributed little to the ongoing battled between risk appetite and risk aversion. On the other hand, the markets and risk may be  thrown for a loop tomorrow. US NFPs will no doubt shape growth forecasts and have a significant impact on equities - and therefore the carry trade.

Written by Terri Belkas and John Kicklighter, Currency Analyst for

Questions? Comments? Email: [email protected] or [email protected]




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