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Friday September 2, 2005 - 21:05:06 GMT

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Forex: Dollar Looks Ahead to Smaller Payroll Gains in September

DailyFX Fundamentals 09-02-05

By Kathy Lien, Chief Strategist

· Dollar Looks Ahead to Smaller Payroll Gains in September
· Pound Soars on Strong Construction Data but Uncertainties Still Lie Ahead
· Market Looks Ahead to Busy Eurozone and Japanese Economic Calendars

US Dollar

The much awaited non-farm payrolls report that was released this morning was very mixed. The number of jobs created in the month of August were less than expected, rising by only 169k compared to the market’s forecast for 190k growth. The manufacturing sector shed 14k jobs as well, marking the third consecutive month of job losses in the sector. However, there was a strong upward revision of 35k jobs to the July report and the unemployment rate fell from 5.0% to 4.9%. The reaction in the dollar indicated that the release was far from surprising. The release was not weighted significantly in one direction or another, which just gives traders an even better reason to look past this release and focus on the potential weakness of the September report. With a million people evacuated out of New Orleans area, up to 500,000 people could face permanent job losses. It is estimated that it could be months before people can return to the city of New Orleans and even when they do, for a city that is so dependent on tourism, it could take far longer for tourists to begin filtering back into the city. To our dismay, it seems that things are only getting worse down south with CNN reporting of first a fire and then a huge oil spill near the storage tanks on the Mississippi River. Although over the longer term, the recovery and rebuilding efforts following any disaster tend to be a big boom for the economy, right now the immediate future is so bleak that even announcements of oil being released from the Strategic Reserves is doing little to help offset the market’s bearish dollar sentiment. Analysts across Wall Street are calling for the EURUSD to rally as high as 1.30. Although we have been bearish on the greenback for some time, we think that the latest move has been both sharp and extensive. As a result, we would not be surprised to see some consolidation next week, especially since there are not that many important releases on the US economic calendar.


The Euro shot higher once again led by broad dollar weakness ending the week up over 350 pips. The only notable release this morning was producer prices for the entire Eurozone, which increased 0.5% in the month of July, right in line with expectations. Similar to the situation here in the US, the feed through between producer and consumer prices have been limited – undermining the significance of the PPI report. On the political front, the latest polls indicate that Schroeder’s Social Democratic Party is gaining support. It appears that the market prefers the opposition party to win rather than SDP Party. Meanwhile the economic calendar for the Eurozone is extremely busy with a variety of service sector, retail sales, industrial production and trade balance reports coming out of the region. With the barrage of data, it will be difficult for the market not to be somewhat focused on the performance of the Eurozone. Most of the data is expected to show deteriorations over the pervious month and if this proves to be the case, it could give Euro bulls a good reason to lighten up on their positions.

British Pound

Adding to yesterday’s suggestions of recent upticks in economic activity, the Chartered Institute of Purchasing and Supply released its monthly index of construction activity. Expected to post a 54.7 reading, the index reported a 57.4 in the month of August. The recent reading above 50, indicative of expansionary activity, is the 45th month in a row and suggests that things may not be as bad as previously expected. This has led few to speculate that with commercial activity underpinning some suggestions of growth, Bank of England Governor Mervyn King may not be as forthcoming with previously called cuts in the repurchase rate when policy officials meet next week. Even with consumer consumption sluggish, the BOE looks to remain steadfast on their hawkish stance against inflation which remains hovering the benchmark target in Europe’s second largest economy. As a result, traders will be looking ahead to next week’s industrial production figure for further signs that the underlying economy, although sluggish, may be healthier than most expected. Subsequently, however, consumer consumption habits will still weigh heavily on the market and policy officials going into the future as demand had previously led the economy at a healthy pace in 2004 and the beginning of 2005. Even with inflation rising and manufacturing activity propping up expansive potential, consumer reluctancy to contribute to the economy may be the perpetual kink in the chain.

Japanese Yen

No real economic news on the Japanese yen front today with money supply figures being the lone data release. According to the report, inflationary conditions still remain more than tamed as the supply contracted to a 1.1 percent rate from a previous 1.5 percent in the prior month. Next week may offer more for the yen bulls as household spending and consumer confidence figures are set to be released before the Bank of Japan meets to agree about short-term interest rates. Relatively important to the world’s second largest economy, household spending and consumer confidence figures are going to be scrutinized heavily as the most recent figures may reflect the newly placed financial pressures of the recent tax rebate repeal and sentiment reflective of the upcoming September 11th elections. Separately, once again attention was focused on foreign interest in Japanese domestic equities as benchmark indexes closed on fresh four year highs. The Nikkei 225 Index closed at 12,600 on the day, making it the fourth advancing week. Further strength from today’s action looked to be reflective of a report released yesterday which highlighted global investment purchases of $2.7 billion in the previous week.


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