Thursday January 6, 2005 - 22:17:48 GMT
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Dollar Stays Afloat Ahead of Payrolls Despite Weak Jobless Claims
DailyFX Fundamentals 01-06-05
By Kathy Lien, Chief Strategist of www.dailyfx.com
· Dollar Stays Afloat Ahead of Payrolls Despite Weak Jobless Claims
· Euro Slides As German Consumers Cut Spending
· Pound Continues To Slide On Increasing Risk Of Easier Monetary Policy
The dollar has experienced its longest rally against the euro in over a year ahead of tomorrow’s non-farm payrolls report. The recent trend of weaker European data also aided in the euro’s downfall. German retail sales fell by a much larger than expected 2.5% in the month of November. With unemployment at such lofty levels, there is little incentive for German consumers to spend. The details on an annualized basis were even weaker. Retail sales increased a paltry 0.1% year over year while falling a downwardly revised 4.4% yoy in October. Industrial confidence in the Eurozone as a whole deteriorated while consumer confidence remained unchanged. In France however, consumers felt more pessimistic in December than in November. Yet this data, like it has in the past should not have been the leading reason for the euro’s recent sell-off. Instead, expectations for inflation in the US and the outlook for the labor market have impacted the currency’s price action more this week than has the health of the European economy.
It is quite interesting that the market has laid so much importance onto tomorrow’s US non-farm payrolls report even though in all likelihood, it will have a minimal impact on the Fed’s decision to continue tightening. As we learned from the minutes released earlier for the December monetary policy meeting, inflation is becoming a rising concern. In our special NFP report (see www.dailyfx.com), we detailed the signals that other economic releases have provided and we see a mixed picture. While the Challenger survey announced more layoffs and the employment component of the manufacturing ISM report deteriorated, December payrolls may receive a boost from late pre-holiday season hiring. Consumer confidence also improved in December with a 2.3% increase in the number of respondents who felt that jobs were “plentiful.” The market is expecting payrolls to increase by 175k. Today’s economic derivatives auctioned suggest that traders expect the US to add 176k jobs in December. The data released today though tips the scale further in favor of a weaker report. The Monster Employment index that tracks online job postings dipped for the first time in six months while jobless claims increased by the largest amount since March 2002. However a Labor Department official did say that seasonal adjustments were difficult to account for last month, with unadjusted claims up more than double the amount estimated by their formulas. Ultimately what this means is that with the EURUSD trading near critical support levels, the mixed outlook for tomorrow’s report will certainly provide a perfect backdrop for interesting trading.
Falling to a six week low, the British pound fell on a disappointing services industry report. Dropping to a reading of 54.9 from a 56.5 the previous month, according to the Chartered Institute of Purchasing and Supply, the shortfall has now sparked speculation of a benchmark interest rate cut by Bank of England officials. If implemented, this would be the first rate decline in over a year and is comparably different from previous expectations that monetary officials would simply refrain from raising interest rates. Additionally, this would send a confirmation of a more modest expansion in the United Kingdom, as hinted by a recently cooling housing market and poor retail sales. However, with retail prices continually rising, as evidenced in November by 1.5 percent, a confirmed monetary decision is still somewhat unclear momentarily. Additionally lending to the former notion, traders lowered the yield on the December 2005 interest rate futures contract an additional 3 basis points to 4.74 percent.
Traders pushed the Japanese yen lower as focus shifted to tomorrow’s U.S. employment report compared with earlier investment reflection of the domestic equities and brighter economic expectations. Hovering above the 105 level, the pair has experienced a run up of over 250 pips in favor of the base currency in light of improving optimism over Japan’s economy. Speaking at the Japan Society in New York, Bank of Japan Governor Toshihiko Fukui reinforced that the notion Japan may currently be experiencing a “temporary pause” but optimistically suggested that “the Japanese economy is unlikely to fall behind” given that the global economy chugs ahead. He additionally noted that the central bank is monitoring the currency markets “very carefully”. As some may recall, the last time statements of this magnitude were released, subsequent remarks of intervention over the holiday period followed. However, given the current valuation of the domestic currency, it would be highly unlikely intervention efforts will take place.
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