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Thursday July 7, 2005 - 21:56:03 GMT

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Forex: Dollar On Payroll Watch

DailyFX Fundamentals 07-07-05

By Kathy Lien, Chief Strategist of

· Dollar On Payroll Watch
· ECB and BoE Leave Rates Unchanged
· Terrorist Attacks In London Send GBPCHF Plunging

US Dollar
The world’s attention is centered upon the tragic terrorist attacks that occurred in London this morning. Although the attacks were across the Atlantic, the dollar plunged in fear of similar repercussions here in the US. Every major country has heightened their security measures and some closely watched events have also been impacted by the attacks. This was a big week for the UK. Not only did they win the 2012 Olympic bid, but they are also hosting the G8 Summit and scheduled to make an announcement on interest rates. The G8 statement has now been postponed to Friday and the fact that the central bank meeting was held after the attacks means that it could have certainly played a role in the Monetary Policy Committee’s decision. Most London traders also left their offices early, causing liquidity to evaporate shortly after the US open. This allowed US traders to rally the dollar with non-farm payrolls still slated for release tomorrow morning and oil prices finally retracing. As we discussed yesterday, payrolls are expected to be strong with estimates now bumped up to 200k. Jobless claims released this morning remains fairly low. The sharp rise in yesterday’s employment component of the service sector ISM suggests that service sector employment growth could rebound significantly. The last time that we saw a similar rise points wise in the employment component was back in February when payrolls jumped from 124k to 300k. Yet as we cautioned yesterday, thre are risks to such a lofty forecast. Over the past 13 years, economists have over-forecasted payrolls at least two-thirds of the time, which means this time the odds are probably against them once again. This is a big possibility especially since the Challenger report of planned layoffs hit a 17-month high last month, increasing 35%. The most alarming thing is that according to the Challenger Group, there tends to be less layoffs in the summer months, but "The fact that job cuts are rising in the summer is not even the most surprising trend," said John Challenger, CEO of the firm. "The surprise is that we are seeing a growing number of mass job cuts." Don't expect any job additions in the manufacturing sector since the employment component of the ISM report for the sector contracted again in June.

The European Central Bank delivered no surprises this morning when they left interest rates unchanged at 2.00%. They also confirmed that their stance is squarely neutral by saying that although inflation risks remain, weak growth prevents them from raising rates. At this point the Eurozone appears to be finally showing some signs of a modest recovery thanks the weaker Euro. Tomorrow we are expecting more German economic data including German Current Account / Trade Balance and industrial production. Both the current account and industrial production reports are expected to edge lower but given the recent trend of German data, these two releases could also surprise on the upside. As an export dependent country, Germany has been benefiting significantly from the fall in the euro. This will help to damp some of the negative effects from rising oil prices.

British Pound
A solemn day for the United Kingdom as terrorist attacks brought Europe’s second largest economy to its knees temporarily in morning rush hour traffic. As a result, with fears heightened, traders pounded the cable across the board and exacerbated the bearish sentiment that has overcome the currency for the past week. Most notably, with traders giving in for a flight to safety, participants pushed the GBPCHF currency pair violently lower over the course of the morning, dropping almost 400 pips on the day before retracing slightly. The currency pair was one of the hardest hit as money flocked to the safety of the Swiss franc. Unsurprisingly, the tragedy overshadowed the morning’s economic figures. Housing valuations displayed through both the FT and HBOS Plc housing prices reports continued their overall softer stance in light of increases seen in the monthly comparison. Additionally, released shortly after the tragic occurrence, Bank of England officials announced their decision to keep rates at the current 4.75 percent for the 11th month. Speculation had mounted on a rate cut in light of slumping consumer demand and blatant suggestions of sluggish output. As a result, expectations grow increasingly certain of a rate cut when policy makers meet again in August.

Japanese Yen
Like many other counterparts to the greenback, the Japanese yen strengthened on the day only to return gains later on in the session. Traders took advantage, if only momentarily, of higher machine tool orders data and pushed the currency higher. Other than that, the economic calendar remained empty for the region as the effects of the brighterside report and lower crude oil prices dissipated as the session wore on. With that said, traders and economists alike will be anticipating tomorrow’s household spending figures with any increases being a warm welcome as overall declines have plagued the report since August of last year. Separately, it was announced today that Japan and South Africa have agreed to establish a committee in studying the possibilities of starting free trade talks between the two. Seeking a trade and investment pact, Japanese trade officials are looking to win favorable treatment for domestic companies and products on foreign soil. Ultimately, a free trade pact would further open doors for the economy, the first for Japan and an African nation. Trade relations between the two nations already reached $7.5 billion in 2004.


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