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Friday August 6, 2010 - 15:27:41 GMT
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FX Briefing - US labour market report sends dollar to new lows (BHF)

FX Briefing 6 August 2010


ECB sees improvements in economy and financial markets

Job cuts in US public sector outnumber increase in private sector jobs.

FOMC leaves monetary policy on hold


US labour market report sends dollar to new lows


Market participants’ assessment of the economic outlook, and of course the direction of monetary policy (the Open Market Committee is holding its next meeting on Tuesday) will probably be influenced by the US labour market figures, which were published today. Beforehand, markets had been bracing themselves for a disappointment. They were particularly worried that the increase in private sector jobs, which had only been moderate as it was, might have ground to a halt, forcing the Fed to resort to more quantitative easing.


Thus the dollar’s slide continued this week: the ICE US Dollar Index Futures fell below its 200- day moving average. By mid-day on Friday, the euro had gained almost 2 cents against the dollar, rising to just under 1.32, and rose to over 1.33 after the release of the US employment data. The dollar also fell against the yen, which climbed to an 8-month high of 85.15. Only the Swiss franc was as weak as the dollar this week. EUR-CHF rose from 1.35 at the end of last week to over 1.38 – despite signs that the SNB was selling some of its bloated foreign currency reserves.


The July US labour market data were indeed disappointing: employment declined by a total of 131,000. Although new jobs in the private sector rose by 71,000, this pales to insignificance compared with the 252,000 job cuts in the public sector, which far outnumbered the Census-related job losses (143,000). The significant downward revision of the June figures by almost 100,000 to –221,000 also had a negative effect. Here the additional job cuts were divided evenly between the public and the private sector.


Nevertheless, we are still not expecting the FOMC to send out any new monetary policy signals on Tuesday. The Fed is likely to maintain its expectations of a moderate recovery with a gradually improving labour market, but is likely to emphasise the risks and uncertainties a bit more than in June. Otherwise, the committee will probably merely reiterate its intention of maintaining its exceptionally expansionary monetary policy for an extended period.


On the whole, we are not expecting the other economic data due to be released next week to bring any unpleasant surprises. The US trade balance deficit will probably have widened again in June, but this information is actually already contained in the Q2 GDP figures. Eurozone Q2 GDP data, released next Friday, could have a positive impact on the euro. Here expectations are quite high, however. And furthermore, not even the ECB’s more hawkish comments have been able to boost the euro much recently.


ECB Council: some improvements


As expected, the ECB governing council meeting on Thursday did not bring any major surprises. The central bank stated that it expected GDP to grow at a moderate and uneven pace. A few minor changes in the statement suggest, however, that the ECB is at least toying with the idea of reverting to its original strategy of a gradual exit from unconventional measures in September. At the end of April, the ECB had, for the first time since the Lehman collapse, offered a 3-month variable-rate tender, but had then reverted to fixed-rate tenders with full allotment because of the escalation of the debt crisis.


At the press conference after the meeting, ECB president Jean-Claude Trichet said that economic activity in the euro area had expanded faster than expected; the second quarter had been very good. It looked as though the pace of growth might be slightly slower in the third quarter than in Q2, but it could still exceed expectations. It is also striking that the statement no longer talks of “high uncertainty” but merely of uncertainty. This is in direct contrast to Fed statements, which have seen an increase in growth risks recently.


Mr Trichet’s assessment of the financial market situation is also cautiously positive: he sees a significant improvement in government bonds; the development of money market rates shows that the situation is normalising. The bank stress tests were an important step towards restoring confidence and had confirmed the resilience of the banking system. Furthermore, Mr Trichet mentioned the joint review carried out by the EU Commission, the IMF and the ECB, which said that Greece’s fiscal consolidation efforts had got off to a strong start. He put the weaker Bank Lending Survey results down to the fact that the survey had been taken at a bad time.


We see several signs indicating that the ECB will revert to its exit strategy in September. Long-term refinancing operations could well be offered as variable-rate tenders again in October. That would presumably raise the costs of obtaining longer-term liquidity significantly above the refinancing rate. Furthermore, the overnight rate would probably continue to approach the refinancing rate, when three long tenders (12, 6, and 3 months) totalling €225bn mature at the end of September, and the excess liquidity is likely to be reduced further.


Stephan Rieke +49 69 718-4114


Economics Department

+49 69 718-3642

[email protected]

Foreign Exchange Trading

[email protected]

Matthias Klein

+49 69 718-2175

Matthias Grabbe / Klaus Näfken

+49 69 718-2146 / -2683


This report has been prepared by BHF-BANK Aktiengesellschaft on behalf of itself and its affiliated companies (together "BHFBANK Group") solely for the information of its clients.


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