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Wednesday March 2, 2005 - 22:15:08 GMT
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Dollar Shrugs Off 17% Rise In Announced Layoffs

DailyFX Fundamentals 03-02-05

By Kathy Lien, Chief Strategist of www.dailyfx.com

· Dollar Shrugs Off 17% Rise In Announced Layoffs
· Eurozone Growth Maintains Third Quarter’s Downgraded Pace
· Australian Dollar Sells Off On Surprisingly Weak Growth

EURUSD

With Greenspan at the podium, the dollar continues to gain strength against the euro as the Fed Chairman confirmed that the US economy is growing at a “relatively good pace.” It also appears that traders may have also sold the euro in response to weaker GDP growth, which increased 0.2% in the fourth quarter, but third quarter growth was revised downwards from 0.3% to 0.2% Q/Q. However, the market has failed to notice underlying improvements in consumer spending and investment growth. In contrast to Monday’s softer CPI report, producer prices were higher in the month of January. Also for the same month, German retail sales saw a sharp 2.1% rise. As a result, the ECB has raised its growth forecast for the second quarter from 0.2%-0.6% to 0.3%-0.7%. Yet, regardless of the improvements in recent data, we continue to believe that the EURUSD will only answer to the call of US fundamentals for the time being. With Greenspan’s speech dropping off our watch list, the only piece of data worth anticipating will be Friday’s US non-farm payrolls report. As result, we will probably see little interesting price action in the EURUSD before then. The latest FXCM Speculative Sentiment Index (SSI) confirms the bullish bias of our traders following Greenspan’s testimony.

USDCHF

With the only piece of important data on the US economic calendar today being the Challengers layoff report, Friday’s non-farm payrolls release is already entering center stage. According to the Challenger report, US companies have announced 17% more layoffs in February than in January as a result of increasing mergers and acquisition activities. This report contrasts significantly with the trend of jobless claims, which has shown a sharp improvement over the past month. The question then is which report is more reliable. Jobless claims tend to be a better measure of actual job loss since the report represents new people filing for unemployment benefits. Plans for layoffs can be distorting since some of the job losses will be taken care of through attrition, early retirement or replacement in different roles within the company or subsidiaries. Also, some job losses may not even occur if business picks up. Yet, after being consistently disappointed for multiple months by consensus forecasts, it is difficult to be overly optimistic about payrolls. Based upon the latest Bloomberg survey, 82% of economists polled expect payrolls to come in above 200k. Although 114k is the consensus forecast, 200k should be the magic number on the downside. Any number below that and the euro should see a nice jolt higher while any number above 275k will certainly please dollar bulls. Meanwhile, oil prices have broken above $53 per barrel, which is the highest level we have seen since October 27. In less than 3 months, oil prices have surged 32%.

GBPUSD

The pound has lost some steam after Tuesday’s speculations that the Bank of England would raise its benchmark interest rate to curb accelerating inflation in the housing market partially dissipated. Yesterday’s Nationwide house prices report had shown a 0.5% rise in February, but other economic news, such as the CBI distributive trades report and CIPS PMI, had quieted the hawkish whispers. Today’s UK Manufacturing PMI continued yesterday afternoon’s trend with an unchanged reading of 51.8 in February. Economists had hoped for an improvement to 52.4, but the report showed that factories had struggled to avoid a recession as rising raw material prices, amongst other forces, crimped profit margins. While there were some signs of strength in domestic demand, manufacturers blamed the pound’s strength for a softening in export demand. The export component of the report registered at 49.6, a modicum below the benchmark of 50.0 that marks the divide between contraction and expansion. The news further substantiates the hypothesis that the UK economy is at a standstill.

USDJPY

Consolidating for the session, the Japanese yen rose to a high of 105.11 before falling back to hover at the 104.50 support level for the remainder of the day. Economic data was rather thin as the lone report contained information on the monetary base for the month of February. Rising a paltry 1.2 percent, the most recent data falls short in comparison to a 3.9 percent rise in the previous period, proving that deflationary conditions still persist. This is rather disappointing, as expectations of price increases had been sparked earlier in the year with policy officials forecasting a reversal in downtrodden production and output in the domestic economy. However, with recently better than expected data releases and a strengthening equities market, the report may only be momentarily suggestive and not reflective of future growth prospects. As a result, market players will be focusing on forthcoming economic suggestions to bolster earlier mentions of an up tick in industrial production and domestic demand witnessed at the beginning of the week, in light of thin economic data.

 

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