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Thursday August 4, 2005 - 21:37:36 GMT

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Non-Farm Payrolls - Expected to Be Good

DailyFX Report 08-04-05

· Bank of England Becomes First Major Central Bank to Slash Rates
· Dollar Slides Ahead of Non-Farm Payrolls
· Euro Rallies as Strong German Factory Orders Becomes Just Another Confirmation of Strength

US Dollar
With the 1.2250 level behind us, the market now seems to be aiming for the 1.2500 level against the Euro. Traders are somewhat reluctant though to push the Euro above the 1.2400 level before seeing the outcome of tomorrow’s non-farm payrolls release. We have been talking about the report all week and have been saying that the evidence so far points to a strong outcome. The forecast is for 180,000 jobs to be added in the month of July compared to 146,000 in June. Unlike the previous two months, there’s good reason to believe that the forecast has a fair chance of being met this time around. Taking a look at data leading up to this release, we see that hiring in manufacturing sector has picked up after the ISM employment component moved up 3.3 points into growth territory from being below 50 for the past two months. Even though there were no improvement sin the non-manufacturing ISM employment index, this month’s strength and perhaps some hiring activity left over from last month should drive job increases in service-producing industries. Also, looking at the jobless claims data, four-week averages of both initial and continuing claims declined in the month of July and weekly initial claims were lower than forecasts for the last 2 weeks of the month. All signs are pointing to a positive payrolls report, but estimates by economists across Wall Street range from a low of 80k to a high of 300k. Excluding the one outlier at 300k, the next highest estimates are two economists calling for 250k job growth. This indicates that the market is really quite divided on the direction of the surprise and any release below 150k or above 210k could deliver to us another wild day that would validate Non-Farm Payrolls as the number market moving indicator for the US dollar over the past 2 years.

The Euro soared for the seventh consecutive day against the dollar, which marked its longest string of gains in over 8 months. Unsurprisingly, the European Central Bank left interest rates unchanged at 2.00%. Keeping in line with the recent trend of solidly improving economic data, German factory orders rose 2.4% in the month of June, compared to expectations for zero growth. Without a doubt the German economy is improving and on the track for a healthier recovery. Meanwhile we want to take this opportunity to talk about the razor sharp accuracy of the FXCM Speculative Sentiment Index. Last week, when the ratio flipped from longs to shorts on 7/27/05, our leading headline was “Ratio Remains Net Short, USDCHF Flips to Negative - Signals Possible Bottom in EURUSD.” Since then, the EURUSD has rallied 300 pips, all the while the SSI continued to remain net short, which as a contrarian indicator signaled that more gains were in store for the EURUSD. The ratio is now at –1.65, even more short than we reported in our weekly update this morning. Although tomorrow’s non-farm payrolls report could certainly shift the makeup of positions quite a bit, going into the report, the SSI index signals that we are headed towards 1.25.

British Pound
Who would have thought? - The Bank of England became the first major central bank to slash interest rates since the global tightening cycle began in 2003. Given that the move was widely expected, the British pound barely reacted on the back of the announcement. The significance of the move should not be underestimated. This is the first time that the BoE has cut interest rates in 2 years. With the British pound traditionally laden with speculators long the pair for carry, we suspect that most have already abandoned the Queen’s currency. From here on forward, it will be hard for rallies to be as impressive and as long-lived as we saw back in 2003 and at the end of 2004. Yet just because the central bank reduced interest rates today does not mean that there will be more rate cuts down the road. The central bank’s statement said that “Downside risks remain in the near term. Looking further ahead, however, the rise in equity prices and the recent fall in the exchange rate should boost activity.” Recent data has been mixed so unless growth continues to contract significantly over the next few months, rates could remain at 4.50% for the second half of the year.

Japanese Yen
A spate of action looks to be in store for the Japanese yen tomorrow as a key economic report may add some much needed volatility to the consolidating underlying spot. With previous mentions of potential inflationary pressures and a pickup in economic growth, tomorrow’s household spending figures will prove to be key in confirming either notions. Already rising in the monthly figures, traders and proponents alike will both be looking for some positive change in the overall yearly figure as well. Notably, tomorrow would have marked the deadline for the attention grabbing postal privatization vote by the Upper House of Parliament. However, hitting the wire shortly after midday, the pivotal vote was postponed till sometime next week, confirming yesterday’s speculation. As a result, the inherent political risk looming throughout the week remains going into the weekend with the prime minister struggling to build support for the bill’s passage. Critical to Koizumi’s financial system reform, the $4.2 trillion break up and sale of the Japan Post would create a considerably large personal insurance giant as well as the world’s largest savings bank. However, considerable resistance has been mounted in recent days as representatives of the Upper House have rejected the idea, prompting the prime minister in threatening to dissolve the Lower House.


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