Thursday July 3, 2008 - 23:46:09 GMT
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FX Research - Dollar Rallies after NFP - How Much Further Can it Rise?
â€˘ Euro Collapses as Trichet Proves to be a Big Disappoint
â€˘ British Pound: Economic Data Continues to Worsen
Dollar Rallies after NFP - How Much Further Can it Rise?
Non-farm payrolls were right in line with expectations, triggering a
broad based dollar rally. Even though the US economy saw a net job loss
for the sixth consecutive month, the sheer fact that non-farm payrolls
was no where near -100k, was enough to drive the dollar higher (More
details on Non-Farm Payrolls). According to the yield curve, traders
now expect more aggressive tightening by the Federal Reserve than the
ECB over the next 12 months. If inflation continues to trend higher,
this is very possible since the Fed has more room to raise interest
rates. The ECBâ€™s disappointment and the marketâ€™s relief that NFPs were
not as bad as they could be should lead to further dollar strength in
the coming week. However the underlying weakness in the payrolls report
and the sharp drop in service sector ISM indicate that the US economy
is still on a downward spiral. Payrolls for the month of June was
revised to more negative levels, while the unemployment rate remained
unchanged at a 4 year high. With jobless claims topping 400k last week,
the labor market will only get worse in the coming months. American
Airlines announced today that 7,000 jobs will be cut by the end of 2008
to offset the pain of rising fuel prices. This follows the equally
severe layoffs announcements that we have already heard from Starbucks,
Citigroup and Goldman Sachs. The service sector is back in
contractionary mode with the ISM index falling from 51.7 to 48.2. The
employment component of the report fell to a record low, foreshadowing
more problems in the labor market. Yet even as economists and analysts,
(us included) are calling for doom and gloom, the numbers have yet to
show it. Todayâ€™s NFP figures are not as bad as the market feared while
consumer spending remains positive. Inflationary pressures on the other
hand are continuing to rise. Oil prices hit a new record high above
$145 a barrel. This will add further pressure to the prices paid
component of service sector ISM, which already hit an 11 year high in
the month of June. The US economy will worsen, but probably not as
quickly as inflationary conditions. The rise in oil prices is testing
the patience of the Federal Reserve. If they continue to remain on hold
and fail to indicate when they plan on raising interest rates, the
rally in the US dollar could be limited.
Euro Collapses as Trichet Proves to be a Big Disappoint
For the first time since 2007, the European Central Bank raised
interest rates by 25bp to 4.25 percent. However despite this move, the
Euro dropped more than 200 pips when ECB President Trichet failed to
signal to the markets that interest rates would be increased again this
year. Going into the ECB meeting, the Euro rose to a high of 1.5910,
indicating that currency traders were clearly banking on hawkish
comments. Instead, Trichet played down the prospect of more rate hikes
by saying he has â€śno biasâ€ť more than 5 times in the question and answer
session with reporters. For Euro bulls, having no bias is just as bad
as not having raised interest rates today. Despite strong retail sales,
a sharp drop in the German unemployment rate and much stronger than
expected producer prices, the ECB was surprisingly neutral. For a
staunch inflation fighter, it is quite uncharacteristic to have no bias
especially on a day when oil prices hit a new record high. German
factory orders are due for release tomorrow. A strong rebound is
expected but that may not have much of an impact on the Euro. We expect
a bit more weakness before some stabilization in the EUR/USD.
Visit the Euro Currency Room for resources dedicated specifically to the Euro.
British Pound: Economic Data Continues to Worsen
The British pound extended its losses as bad news continues to pour out
of the UK. Service sector PMI fell to the lowest level since October
2001. This is the first time in 7 years that there has been a
contraction in service, manufacturing and construction sector PMI. Back
then, GDP growth slowed to 0.1 percent, the lowest level since the
second quarter of 1992. These numbers explain why the Bank of England
has been so reluctant to raise interest rates. They know that their
economy is in bad shape and that the downturn is deepening. We expect
the UK labor market to fall into the same downward spiral as the US
labor market. Many of the jobs that have been cut in the financial
sector have been worldwide and London will feel the same pains as the
Visit the British Pound Currency Room for resources dedicated specifically to the British Pound.
Australian, New Zealand and Canadian Dollars Hit by US Dollar Strength
Broad dollar strength has pushed the Australian, New Zealand and
Canadian dollars lower. The Australian trade deficit was slightly wider
than expected as exports slow and imports grow. Like the rest of the
world, oil is the primary culprit. With Australia now back to running a
trade deficit, second quarter growth remain soft. In the first quarter,
the Australian economy actually grew by the slowest pace in 2 years.
Interestingly enough, commodity prices were unchanged in the month of
June. The annualized pace of growth still remains near record highs.
Canada is the only country with any meaningful economic data tomorrow.
The IVEY PMI report is due for release. Although a dip is expected, the
index should remain near its 11 months highs.
Tell us what you think on the Canadian dollar Forum.
No Blowout Moves in the Japanese Yen
The US dollar was itching for a breakout against the Japanese Yen prior
to the non-farm payrolls report. Even though a breakout did occur (from
the triangle formation), the rally was modest at best. Resistance is
still at 107.20 and with the US markets closed for Independence Day
tomorrow and no meaningful data due for release next week, the currency
pair will probably remain trapped within its 105 to 108 trading range.
It is worth noting that CHF/JPY hit a 17 year high this morning, but
the gains were quickly erased after the NFP release.
Visit the Japanese Yen Currency Room for resources dedicated specifically to the Yen.
By Kathy Lien, Chief Strategist of DailyFX.com
Contact Kathy Lien about this article at [email protected]
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