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Thursday June 2, 2005 - 21:52:41 GMT

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Forex: Traders Long Dollars Going Into Payrolls

DailyFX Fundamentals 06-02-05

By Kathy Lien, Chief Strategist

· Traders Long Dollars Going Into Payrolls
· Euro Rallies As Trichet Ignores Calls For Rate Cuts
· Mixed Housing Market Data Does Little For Pound

US Dollar
After this past week’s extensive rally in the dollar, it is not surprising to see some profit taking ahead of tomorrow’s non-farm payrolls report. Right now the consensus estimate is for 175,000 jobs to be added to the economy, compared to 274,000 jobs added the previous month. Yet, the actual range of estimates run the gamut of 115k to 240k. April was a great month for job growth, but such impressive gains will be hard to replicate this time around since we wont have the benefit of a number of factors that may have overstated the April release such as the Easter holiday shift, the five week survey period and distortions due to the Labor Bureau’s birth-death model. According to the FXCM Speculative Sentiment Index released this morning, speculators in the market are extremely long dollars and short euros. Therefore, since bulls already have their long dollar positions on, a blockbuster 200k plus number should have a more limited reaction in the EURUSD than a sub-150k number. Based upon the most recent data that we have received today and over the past few weeks, 175k will be a tough hurdle to overcome. The latest Challenger report of planned job cuts in May jumped 42% compared to the previous month with layoffs in the technology sector increasing eight fold. Jobless claims also climbed to the highest levels in 9 weeks, bringing the four-week average of claims in May to 334k, compared to April’s five-week average of 325k. The last 2 times that average claims were approximately 334k, was back in March (336k) and January (330k), when we saw 146k and 124k non-farm payroll gains respectively. This suggests that May’s jobless claims data should coincide with a weaker number in payroll growth. As it appears, the risk is tilted more towards a downside surprise in payrolls and given the mix of current speculative positioning, bears could also be sitting tight and waiting for the results of NFPs to take profits on their shorts, which would result in a nice contra-trend move.

After all of the fan-fare surrounding the European Constitution and the end to the two most important votes that we have been focusing on for the past two weeks, the market has finally settled and shifted its attention away from politics and back to economics. Today, the European Central Bank ignored calls for a rate cut and instead chose to celebrate its one year anniversary of leaving rates unchanged by standing pat on interest rates once again. The central bank also cut growth projections to 1.4% for this year and 2.0% for next. Despite calls for rate cuts, Trichet said such move was “not an option” and that if the ECB was considering an interest rate cut, they would send some sort of message to the market that led people to believe that they are in fact preparing for a rate cut. Some press articles have interpreted his “not an option” as a hint of a possibility of an ECB rate cut since he used different wording this time around. However, in our opinion, playing with words is something the Fed is famous for, not the ECB. The latter likes to prepare a market for the imminent rather than shock it with surprises.

Fluctuating wildly in the overnight hours, the British pound remained in the established range from the previous session as hopes for a reversal in the cable’s negative fortunes were dashed on further suggestions of not only a bottom in the housing market but a potential collapse of the sector. According to the Nationwide housing price report for May, residential valuations climbed a paltry 0.3 percent compared with a 0.9 percent rise in the previous period. On an annualized basis prices actually contracted, falling to 5.5 percent from 7 percent in April, significantly low in comparison to a 20 percent annualized expansion in the previous summer. Additionally, construction activity also showed signs of sluggishness. Released at a 52.6 reading, the May report has broken the three-month average of 54.6. Although still indicative of expansion, the lower print has sparked some speculation of an imminent slowdown and may further monetary officials in remaining pat on the current benchmark rate when they meet next week. However, the only exception, as mentioned in the minutes of their last gathering would be the adverse effects of the current consumer credit balance.

Japanese Yen
Declining from an intra-session high of 108.86 hit late in the New York session, the Japanese yen gained some strength as market participants unwound long dollar positions in the overnight. Attributed to the shortfall looks to be a lone tepid economic data release as well as a key technical resistance level, with most speculating the influence of the latter as being greater. The monetary base report for the month of May showed a 2.2 percent increase in the supply of money as many economists expected a 2.5 percent rise. Although approximately in line with the consensus, the recent reporting shows that deflationary conditions continue to persist in the world’s second largest economy, further quelling any rate speculation. Last month’s supply pool rose 3 percent, indicating a slight contraction. As a result of the lackluster evidence and with no further releases scheduled for the week, attention will be placed on next week’s flurry of data. Most importantly, yen bulls will desire confirmation of the previously positive eco figures through CAPEX and consumer spending reports.


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