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Friday November 7, 2008 - 22:57:10 GMT
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Forex Research - US Unemployment Rate Hits 14 Year Highs, But Rate Speculation Drives FX and Equities

US Unemployment Rate Hits 14 Year Highs, But Rate Speculation Drives FX and Equities Last Updated 11/7/2008 5:31:20 PM EST (GMT +5)

TODAY’S BIGGEST PERCENTAGE MOVERS

AUD/JPY ( +125 pips or +1.91%)

CAD/JPY ( +132 pips or +1.40%)

AUD/USD ( +92 pips or +1.37%)

THE STORIES IN THE CURRENCY MARKET

  • USD: US Unemployment Rate Hits 14 Year Highs, But Rate Speculation Drives FX and Equities
  • EUR: ECB Is Meeting Not Beating Expectations
  • GBP: Big Week Ahead for the British Pound
  • CAD: Canadian Employment Surprises to the Upside
  • AUD: Leads Gains in the Currency Market
  • NZD: Producer Prices and Retail Sales Due for Release
  • JPY: Slips as Equities Recover

EXPECTATIONS FOR UPCOMING FED MEETINGS

** PERCENTAGES MAY NOT ADD UP TO 100% BECAUSE OF THE PROBABILITY OF LARGER OR SMALLER MOVES BEYOND THOSE SHOWN ON THIS TABLE

US UNEMPLOYMENT HITS 14 YEAR HIGHS, BUT RATE SPECULATION DRIVES FX AND EQUITIES

Half a million jobs were lost in the US economy over the past 2 months, driving the unemployment rate to a 14 year high. Even though October non-farm payrolls fell short of our -300k expectation, the 240k drop and the revision from -159k to -284k for the month of September is just as pessimistic. The US labor market is in a recession and the latest numbers confirm that. However equities actually rallied on the bearish report as investors interpreted the data to mean that the Federal Reserve will cut interest rates by 50bp next month. The sell-off in the US dollar against every major currency pair except for the Japanese Yen indicates that it is the rally in equities that is driving currencies. Trading will be interesting in the week ahead with the lack of any major US economic data until Thursday. Retail sales are due for release on Friday and the expectations of a sharp decline in consumer spending could send investors back into the US dollar and Japanese Yen.

Risk of 8% Unemployment in the US

In the month of October, the unemployment rate jumped from 6.1 to 6.5 percent. Although this is the highest since 1994, it is expected to climb. Many economists have now increased their forecast for unemployment to 8 percent, which would be the highest level in a quarter of a century. The last major peak that we saw in unemployment that was higher than current levels was in 1992, when the jobless rate hit 7.8 percent. In the 1982, it was as high as 10.8 percent. Given that this downturn is widely described as the worst since the Great Depression, an 8 percent unemployment rate, which is 2 full percentage points less than the unemployment rate in 1982, would not be out of the question. Near the end of the Great Depression, the unemployment rate hit a high of 25 percent in 1933. Since the structure of the labor market has changed a lot in the past 75 years, a 25 percent unemployment rate is far-fetched, but what all of these historical instances indicate is we have yet to see the bottom in the US labor market. Finding new jobs has become extremely difficult in the current market environment, but thankfully President Elect Obama has promised to work on extending unemployment benefits to those who are out of work once he takes office on January 20th.

US Automakers Seek Government Bailout

The non-farm payrolls report and Barack Obama’s first press conference as the new President Elect would have been enough to create fireworks in the financial markets, but big news also came out of General Motors and Ford. Two of the country’s largest automakers have reported sharp losses – General Motors posted a $2.5 billion quarterly loss while Ford reported $129 million loss. Both companies have been forced to seek government aid as they are quickly running out of cash. Ford burned through $7.7 billion, leaving them with only $18.9 billion in available cash while General Motors used up $6.9 billion, leaving them with only $16.2 billion in cash. GM even declared that they would be forced bankruptcy next year if they did not receive any government intervention. Job cuts are expected at both automakers as they try to cut costs and preserve cash. GM employs approximately 263k workers while Ford employs 246k workers. If they were allowed to fail, it would lead to another half million job losses. Barack Obama’s comment today about the importance of the automakers suggests that he will back some sort of rescue package. However more bailouts using public funds will lead to more questions about how Americans will pay for it.

The Week Ahead: Federal Reserve, Retail Sales and the US Dollar

Fed funds futures are currently pricing in another half point rate cut by the Federal Reserve next month, which would take interest rates down to 0.5 percent. The two most important US economic releases next week are the trade balance and retail sales. Even if consumer spending contracts by much more than the market’s forecast, it will not force the Federal Reserve to cut by 75 instead of 50bp. Something catastrophic would need to happen for the Fed to agree to take interest rates from 1 percent down to 0.25 percent in one shot. Therefore like the non-farm payrolls report today, a weak retail sales report may not be completely negative for the US dollar. USD/JPY is moving entirely on the heels of US equities and if stocks resume their slide in the coming week in anticipation of weak consumer spending, USD/JPY, EUR/USD and GBP/USD could slip once again.

EUR/USD: ECB IS MEETING NOT BEATING EXPECTATIONS

This week, the European Central Bank and the Swiss National Bank both cut interest rates by 50bp. This latest rate cut will not be their last as growth slows in both economies. However the difference between the ECB and the SNB or the Bank of England is the fact that they are meeting not beating expectations. The rate cut by the SNB was a surprise move that reflected the central bank’s commitment to fight off a recession. The contrast is even sharper when we compare the ECB with the the Bank of England who slashed rates by 150bp. Trichet has been reluctant to admit that the Eurozone economy is in just as a bad shape as everyone else and that could come back to haunt him in the coming months. The ECB may find themselves still cutting interest rates when everyone else is drawing their easing cycles to a close. The EUR/USD struggled to hold onto its gains today despite the weaker than expected US non-farm payrolls report. In the week ahead, the German ZEW survey and the third quarter GDP report are due for release. With retail sales and trade slipping in the Q3, growth is expected to slow. Aside from the SECO consumer climate index, the Swiss economic calendar is devoid of any meaningful economic data. The unemployment rate ticked up from 2.4 to 2.5 percent in October.

GBP/USD: BIG WEEK AHEAD FOR THE BRITISH POUND

This past week, the Bank of England proved to the financial markets that they are serious about quickly pulling the UK economy out of a recession. This spirit has prevented the British pound from falling further despite a 150bp rate cut from the central bank this week. Although we are delighted that the BoE has done the right thing and only wish that other central banks would have done the same before they ran out of room to cut interest rates, the market’s confidence in the BoE may not put a permanent stop to the British pound’s slide. Of all of the major countries, the UK has the busiest economic calendar in the coming week and we expect a lot of volatility in the currency. Not only is the Bank of England releasing their Quarterly Inflation Report, which will shed more light on the state of the economy and monetary policy, but producer prices, the trade balance, and the employment report is due for release. We expect all of the numbers to reflect growing strains in the UK economy.

CANADA HOLDS ON TO POSITIVE JOB GROWTH

The Canadian employment change is still hanging onto positive territory. In comparison to last month’s strong report of more than 100k jobs, this month’s 9.5k change may appear to be disappointment. Yet when considering expectations pointed towards a loss of 10k, and the fact that the US shed more than 200k jobs, Canada’s labor market seems to be booming. Unsurprisingly this positive report has helped the Canadian dollar strengthen against the greenback. Next week, Canada will be releasing Housing Starts and the New Housing Price Index, and International Merchandise Trade on Thursday - these are not very market moving reports. Traders will instead have their eyes on oil prices to see if it will close below $60 a barrel. The Australian and New Zealand dollars posted nice gains today as risk appetite recovers. The construction sector PMI index for Australia also improved last month, which may have helped the Australian dollar. In the coming week, there are no major Australian economic releases. New Zealand on the other hand has producer prices, business PMI and retail sales due for release.

JAPANESE YEN SLIPS AS EQUITIES RECOVER

The 2.85 percent rally in the Dow has driven the Japanese Yen lower against all of the major currencies. Japanese markets are clearly feeling the effects of a global economic slowdown. The country that had limited its exposure to the toxic assets that plague the rest of the industrialized world, have been hit hard because they depend heavily on international demand. The Nikkei slid more than 3.5% in response to some major disappointments from the largest Japanese companies. The Japanese auto market in particular has suffered due to a global slowdown in the automobile industry. Another explanation for the selloff is rooted in the fact that US Jobless Claims rose more than expected. Fewer jobs mean fewer sales for Japanese automakers and electronics manufacturers. Companies such as Olympus and Toyota registered more than a 9% drop in share prices. Many worry that Toyota will soon lose its grip on profitability. The strength of the Yen has taken a big toll on the export driven economy. Next week is packed with influential economic releases for Japan. The Trade Balance and Current Account are expected for Monday, Bankruptcies and Eco Watchers Survey for Tuesday, the Domestic Corporate Goods Price Index for Wednesday, and Industrial Production for Thursday.

GBP/USD: Currency in Play for Monday

GBP/USD will be our currency in play for Monday. The UK will release their Producer Price Index at 4:30am ET or 9:30 GMT.

GBP/USD remains firmly in place in the Bollinger band sell zone, despite today’s minor rally. Support for the down drifting pair stands at 1.5263, the 6 year low. On the upside, the pair faces several areas of immediate resistance. Hovering right above, where price action failed previously today, is the one-standard deviation Bollinger band and 10-period SMA. In addition, there is a 23.6% retracement, measured from mid-October highs to October 26th lows, at 1.5859. This value was very significant in stopping initial advances and could very well do so again. These levels create a range of resistance at 1.5750 to 1.5914. For a pound rally to begin, the currency must make advances beyond these levels as well as the more significant Fibonacci levels lie above.

About The Author

Lien has extensive knowledge within the interbank market, particularly in trading spot FX and options. She has written for numerous publications, is frequently quoted on financial media outlets, and is the author of several books, including Millionaire Traders. Read more >>

DISCLAIMER: This forum and the information provided here should not be relied upon as a substitute for extensive independent research before making your investment decisions. Global Forex Trading is merely providing this column for your general information. This forum and its information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision based upon this forum or any information contained within. In addition, any projections or views of the market provided by the author may not prove to be accurate. Global Forex Trading and Kathy Lien will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained in this column. Global Forex Trading and Kathy Lien do not render investment, legal, accounting, tax or other professional advice. If such advice is sought, or other expert assistance is required, the services of a competent professional should be sought.



 

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