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Thursday March 3, 2005 - 22:37:07 GMT
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Can Non-Farm Payrolls Bail The Dollar Out?

DailyFX Fundamentals 03-03-05

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

· Can Non-Farm Payrolls Bail The Dollar Out?
· ECB Trichet Says That Rates Will Have To Increase Eventually
· Yen Erases Past Week’s Gains As Oil Breaches $53

EURUSD

The dollar strengthens for the fourth consecutive day as traders brace themselves for tomorrow’s non-farm payrolls report. With forecasts ranging the gamut from a low of 150k to a high of 303k, the market is expecting the report to deliver decent volatility for the EURUSD. There has been very quiet trading in the US session ahead what has since become the most important piece of economic data on the US calendar. US companies are expected to add 250k jobs to payrolls in the month February, which would be at least 100k more than we saw over the last 3 months. The seven-point surge in the employment component of the service sector ISM survey joins jobless claims in support of a strong release. The service sector has provided nearly all of the job growth that we have been seeing over the past few months since manufacturing payrolls have decreased over the last 5 months. Therefore, even though the employment component of the manufacturing sector ISM survey decreased in February, the market already knows that it cannot rely on the manufacturing sector for job growth. Meanwhile, as expected, the ECB left interest rates unchanged at 2.00%. ECB President Trichet indicated that there is no significant evidence of rising inflationary pressures, which is confirmed by the recent fall in consumer prices. He did however say that rates would have to be increased at some point. In contrast to the manufacturing sector, growth in the Eurozone’s service sector actually slowed in the month of February. Strong performance in France was offset by weaker growth in Germany and Italy.

USDCHF

With the dollar holding its breath ahead of tomorrow’s labor market report, we continue to elaborate on this key release. A high number could give bulls a strong reason to rally the dollar. A weak number on the other hand, would let dollar bears breathe a sigh of relief that a potentially dollar positive data has passed with minimal damage to their short dollar trades. There is also an interesting piece of analysis by our friends at Thomson Financial that we want to point out. According to them, the average forecast miss for 2004’s non-farm payroll reports was about 96k (+/-). Historically the miss for the February report has been much higher at 140k, (their survey history dates back to 1992). The standard deviation of the error over the past ten years is about 127k. This means that there is a 68% chance that the outcome falls in a 63k to 427k range. It also suggests the February report has been particularly difficult to call. Thomson has certainly hit on the jackpot, which is that economists have been off for many months. As a result, they could very well be wrong once again. Today’s jobless claims report is impressive, coming in at 310k, which is right in line with expectations and confirms the health of the overall labor market. Service sector ISM increased from 59.2 to 59.8. The bigger news though is the spike in oil prices. Oil prices settled above $53 a barrel, which is the third consecutive day of gains and just a few dollars shy of the October high.

GBPUSD

The British pound continues to slip against the US dollar. With the hawkish comments made at the last Monetary Policy Committee meeting, economic data is being watched very closely to determine whether there is a case for the pre-emptive rate change suggested by Deputy Governor Lomax. Unfortunately, after an already disappointing CIPS manufacturing PMI, today’s service index dropped unexpectedly, giving pause to rate hike speculation. The services PMI fell from 55.9 in January to 55.1 while it was forecasted to increase to 56.0. Although the figure still indicates growth, it’s evident that this expansion has slowed. The volume of existing business and incoming new business both grew while the rates of growth slowed with index figures of 55.5 and 73.6, respectively. Employment growth all but disappeared with a decrease to 50.5 from 51.6. In terms of prices, the survey revealed that operating cost inflation slowed for the third month in a row, but it is still quite high and pressures on operating margins still exist. What this means for monetary policy is that there is too much uncertainty for there to be any assurance of a rate hike in the upcoming meeting and we will have to look to May for the next possible move.

USDJPY

The dollar continues to rebound against the Japanese yen, erasing this past week’s losses ahead of potentially positive US economic data. Foreigners were net sellers of Japanese bonds for the week ending February 26th. Equity demand on the other hand continues to rise gradually. Expectations for the Bank of Japan to lower reserve targets could be potentially bullish for the stock market. The biggest factor underpinning the yen is the sharp rise in oil prices. Government officials once again fear that the stronger growth seen in January could be completely offset in February with the rebound in oil. Japan is a huge net oil importer, which means that higher oil prices will increase the cost of goods for Japanese firms and/or erode profits.

 

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