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Forex Research - How Will the Dollar Trade Post Payrolls?

How Will the Dollar Trade Post Payrolls? Last Updated 12/4/2008 5:25:15 PM EST (GMT +5)

TODAY’S BIGGEST PERCENTAGE MOVERS

CAD/JPY ( -230 pips or -3.07%)

EUR/CAD ( +397 pips or +2.49%)

USD/CAD ( +258 pips or +2.06%)

THE STORIES IN THE CURRENCY MARKET

  • USD: How Will the Dollar Trade Post Payrolls?
  • EUR: The Unusual Strength of the Euro
  • GBP: Hits Record Low Against Euro
  • CAD: USD/CAD Heading Towards 4 Year Highs
  • NZD: Hits 7 Year Low Against the Yen
  • AUD: Stronger than Expected Trade Balance
  • JPY: Yen Crosses Hit Multi Year Lows

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 DOLLAR: HOW WILL THE DOLLAR TRADE POST PAYROLLS?

The countdown to non-farm payrolls has begun and there is little doubt that job losses last month were severe. However the US dollar’s reaction to the jobs report may surprise you because a weak number may not translate into universal dollar weakness. Traders should remember that the dollar has been appreciating not because of the strength of the US economy, but because money flocks into low yielding currencies during a global recession. In a very short period of time, the US dollar has become the second lowest yielding G7 currency. A weak labor market number should mean two things – more weakness for US equities and the possibility of the Federal Reserve taking interest rates to zero. By extension, that should lead to weakness in USD/JPY, EUR/USD, GBP/USD and all of the Japanese Yen Crosses. The only way to avoid another round of selling would be if non-farm payrolls dropped by less than 300k or if we have a big upward revision to the October number. This dollar is already trading higher as equities slip ahead of the non-farm payrolls report even with the day’s good and bad news.

The Bad News: Layoff Announcements Continue to Pour in Signaling

All of the leading indicators for non-farm payrolls point to a very weak number (Full NFP Preview). The employment component of service sector ISM, which is one of the strongest leading indicators for payrolls dropped to a record low. The ADP private sector employment report also fell 250k. Layoffs jumped 148 percent while the number of people on unemployment benefit rolls rose to 4.09 million, the highest level since December 1982. Times were tough in November but December may be even worse. Today AT&T announced their intention to lay off 12,000 employees while DuPont plans to cut 2,500 jobs. This follows JPMorgan’s announcement earlier this week that 4,000 jobs will be cut from Washington Mutual. The closest comparison to the current recession is the one in the 1980s when job losses continued for 17 consecutive months. November would only be the eleventh consecutive month of negative non-farm payrolls. Even the recession in 2001, which was shallower than the current recession saw 15 consecutive months of job losses. This suggests that non-farm payrolls will continue to remain negative into the first half of 2009.

Factory orders also dropped 5.1 percent in the month of October to a 26 year low, reflecting the difficult conditions in the manufacturing sector. Big job losses are also expected in manufacturing payrolls with the sector heading into its 29th consecutive monthly job loss. The strength of the US dollar should continue to add pressure on manufacturers.

The Good News: Mortgage Rates and Gas Prices

On a day that we had a big layoff announcement, weak economic data and sharp losses in the equity market, good news was easily lost in the woods. Thirty year mortgage rates fell to the lowest level since January and the national average of gas prices hit $1.79, more than 55 percent off its summer highs. These two key developments will be central to the recovery in the US economy. In order for the economy to recover, we need to first see the housing market bottom. As mortgage rates fall, it becomes more tempting for anyone who has the money to buy a home. Comments from Federal Reserve Chairman Ben Bernanke suggest that the next step for the US government is direct stimulus or relief for home owners facing foreclosures. Oil prices have also fallen to a 4 year low. High gasoline prices act as a tax hike for consumers, so the recent drop will help to support spending.

EUR/USD: THE UNUSUAL STRENGTH OF THE EURO

In the past week, the price action of the euro has been very unusual. Despite a larger than expected interest rate cut from the European Central Bank, lower oil prices and a sell-off in US equities, the currency has appreciated against the US dollar. There is little to explain the move but the resilience of the currency suggests that someone powerful does not want to see the EUR/USD below 1.25. This could either be the central bank, large funds trying to close their books at favorable levels or M&A demand. The ECB cut interest rates by 75bp today to 2.5 percent. This was the largest move ever by the central bank and a response to the sharp deterioration in Eurozone economic data and the fact that the region is in a recession. Although Trichet did allude to the need for further rate cuts, he does not want the ECB to be trapped in the same situation as the Federal Reserve and the Bank of Japan. They have brought interest rates so low that their monetary policy options have become very limited at this point. Trichet is trying to tell us not to expect the 75bp rate cut to be repeated. Compared to the British and Swedish central banks, the ECB’s move is still nimble which may be part of the reason why the Euro has soared against the British pound and Swedish krona.

GBP/USD: BRITISH POUND HITS RECORD LOW AGAINST EURO

The British pound fell to a record low against the Euro today as rate cuts from both central banks drive the interest rate spread of the currencies from 25bp to 50bp in the Euro’s favor. The Bank of England cut interest rates today by 100bp to 2 percent. Since the beginning of the year, the BoE has eased interest rates by 325bp, making them the most aggressive central bank in the G7. The monetary policy statement noted all of the problems in the UK economy but provided little clues on whether interest rates will be reduced again. We believe that UK interest rates will continue to come down because we have yet to hit a bottom in the UK economy. The market is looking for another 100bp of easing in the first half of 2009, which would bring UK rates down to 1 percent. Unlike the US, there may not be a need to take interest rates down to zero because the weakness of British pound helps to support the economy. In the Monetary Policy statement, the central bank pointed specifically to the favorable growth impact of the weak currency. Since January, the pound has fallen 26 percent against the US dollar and 15 percent against the Euro. Do not expect the central bank to step in anytime soon to stem the currency’s slide.

USD/CAD: HEADING TOWARDS 4 YEAR HIGHS

The Canadian dollar has taken a beating today as falling oil prices, political problems and weaker economic data weigh on the currency. The IVEY purchasing managers index fell to a record low while oil prices dropped to a 4 year low. The markets are also not happy with the fact that Canadian Prime Minister Harper suspended Parliament to avoid being forced out the government. This political drama has lasted for the past 7 weeks as the opposition parties criticize Harper’s handling of the problems in the economy. Canadian Finance Minister Jim Flaherty promised last night that the government will offer a greater amount of stimulus in the upcoming budget released in January. Employment data is due for release on Friday and given the big drop in the employment component of the IVEY PMI report, we could see a sharp deterioration in the labor market. The Australian Trade Balance was higher than expected largely due to increase in the coal prices and the weaker currency.

YEN CROSSES HIT MULTI YEAR LOWS

The US dollar fell to a 5 week low against the Japanese Yen as the Dow Jones Industrial Average tumbled 215 points. USD/JPY should have the cleanest reaction to the non-farm payrolls release tomorrow which means that a weak than expected number should be bearish for the currency pair while a stronger one should be bullish. Milestones were reached in some of the Yen crosses including NZD/JPY which fell to a 7 year low on an intraday basis, GBP/JPY to a 13 year low and CHF/JPY to a 6 year low. Investors were flocking away from the equities and into a “safe haven” of the low yielding Japanese Yen, as Non-Farm Payrolls are expected to decline as much as 400k tomorrow. The VIX, which is a gauge of volatility in the markets, continues to appreciate reflecting concern and nervousness in the markets. Japan released Capital Spending, Foreign Buying of Japanese Stocks, and Japanese Buying of Foreign stocks yesterday. Capital Spending saw a drastic decline as credit and lending remains tight. Foreign Buying of Japanese stocks increased, while Japan buying of foreign stocks declined.

USD/CAD: Currency in Play for the Next 24 Hours

The currency in play for the upcoming 24 hours will be the USD/CAD. Canada is expected to release their Net Change in Employment at 7:00AM EST or 12:00GMT, while we are expecting the release of Non-Farm Payroll and Unemployment Rate from the U.S. around 8:30AM EST or 13:30GMT.

USD/CAD entered the Buy Zone which we established using our Bollinger Bands after 7 consecutive days of gains. Overall, conditions remain bullish for the pair as the price is at risk of hitting its 4-year of 1.30. Tomorrow represents a potential for further gains as Canadian employment is expected to decline adding to already negative market sentiment. Before we see further gains, the pair needs to break the first resistance which currently is placed at the 2nd Standard Deviation at the price of 1.2870. If the first resistance is broken, we possibly could see the momentum to proceed further. The second resistance is a four year high as well as a 78.6% retracement of the January 2004 high and October 2008 low, standing between the price of 1.2950 and 1.30. The cup and handle pattern will be negated upon the break of the support which is the 1st Standing Deviation residing at the price of 1.2580. With Non-Farm Payroll expecting to be negative, we could potentially see price move in either direction with increased volatility.

 

 

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 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 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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