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Forex: Dollar Rallies Ahead of Non-Farm Payrolls
DailyFX Fundamentals 12-01-05
By Kathy Lien, Chief Strategist of www.dailyfx.com
- Dollar Rallies Ahead of Non-Farm Payrolls
- ECB Rate Hike Fails to Bolster Euro
- Dollar Yen Breaks 120 while Nikkei Closes Above 15,000
With non-farm payrolls right around the corner, dollar bulls have jumped back into the markets. Stronger data over the past few days have given them a good reason to expect triple digit gains in payrolls. We failed to see an expected rebound last month, so economists have pushed their optimistic forecasts forward. The current consensus forecast according to Bloomberg is for a 210k rise in payrolls. This comes after the extremely disappointing 56k rebound that we saw last month. A record high in the Monster Employment index, improvements in the employment component of the national ISM manufacturing survey, increasing consumer confidence, an end to the Boeing strike last month and fairly low average jobless claims over the reference period signals that we could certainly see a sharp improvement this month. Therefore even though economists have overestimated payrolls in four out of the past six months, we think that the release could actually come in the ballpark of the consensus forecast this time around. Also the range of forecast is narrower than what we have seen in the past few months with a low forecast of 145k and a high forecast of 350k. With the market already cautiously optimistic, the dollar could easily extend its rally on a exceptionally good number. On the flipside, in the case that we see payrolls come in below 150k, today’s gains could be nothing more than a distant memory. Even though the forecast is for 210k, we believe that the market has much more tolerance for a bad number than we would actually think. This was exactly what we saw last month, when payrolls were close to 100k off forecast. The primary reason why dollar bulls have a higher pain threshold than dollar bears is because they know that even if payrolls come in poorly, the Fed will still continue raising interest rates.
Despite the first interest rate hike in five years by 25bp to 2.25%, the Euro failed to hold onto yesterday’s gains. The sell-off began immediately after the rate decision, as residual speculation for a 50 bp rate hike pushed the EUR/USD lower. The much awaited comments from ECB President Trichet failed to lend the currency pair much support. For the most part, Trichet repeated earlier comments giving little hints that the central bank will follow-up with a series of rate hikes. For a market heavily concerned with interest rate differentials, this caused a blow to the Euro with an interest rate much lower than that of the dollar and the pound. There were mixed reactions from government officials in the Euro-zone, who had been pushing the bank to put off a rate hike due to slow growth in the countries. The ECB does feel that the Euro-zone can withstand this small hike without jeopardizing economic growth; that it must stay with its main purpose of keeping stability of prices. The releases of manufacturing growth and unemployment changes may support this opinion. Manufacturing in the Euro-zone grew in November at the fastest pace in over a year, helped by the fall of the Euro against the dollar and the drop in oil prices. Unemployment in Germany, the Euro-zone’s biggest economy, showed a drop of 53,000, as opposed to the expected 20,000 drop, bringing unemployment down 0.1% to 11.5%. Although these improvements are small, this may signal that the Euro-zone is headed into a gradual recovery and will be able to withstand the small tightening of monetary policy.
The divergence between EUR/USD and GBP/USD price action continues to surprise us. Unlike the EUR/USD, which fell significantly today, the GBP/USD held onto most of yesterday’s gains. This morning, the UK released its Manufacturing Purchasing Managers Index for November, posting a drop to 51.0 from the 51.6 seen the month prior. Within the index, the most troubling change was in new orders, which dropped to 52.2 from 53.6 in October. Traders feared that this may signal problems for the future growth of the manufacturing sector. Despite the fact that this data may signal a stall in manufacturing and a contraction in the British economy in the future, the pound stayed high after the announcement on speculation that the data will not cause the Bank of England to drop rates again. Also released this morning was the CBI retail sales survey, which showed that retailers were highly pessimistic about sales during the vital December holiday shopping season. This release weighed on the pound modestly as now a combination of these two releases would give the Bank of England a case to loosen monetary policy in another attempt to jolt the economy. However, speculations on whether this move will occur within the next few months are still mixed.
The Japanese yen continued its slide against the dollar today with steep losses through the morning allowing the USDJPY pair to trade above the 120 level for the first time since August 2003. However the USDJPY wasn’t the only thing breaking barriers, the Nikkei 225 index gained heavily today, closing above 15,000, a level not seen since October 2000. Surprisingly, the strength of the Nikkei has shown to have a strong negative correlation to the strength of the yen recently. Perhaps foreign investors, showing interest in the growing Asian economy, are fueling the recent surging growth in the index and are being helped greatly by weakness in the yen. Overseas buyers are hedging their Japanese security purchases however by buying the USDJPY, pushing the pair even higher and continuing the cycle as the yen continues to weaken and Japanese securities continue to look more attractive. Japanese buyers, on the other hand, who have been investing heavily in US treasuries, are seeing a flattening US yield curve. This is forcing them to make investments in the US without hedging in order to keep them profitable, not allowing for even a slight balancing of the actions of foreign buyers. The market ignored the sole release from Japan today, showing vehicle sales to have fallen by 8.2% in November. This is the fifth straight monthly decline as major automakers fail to sustain demand by not releasing new models to spark the interest of consumers in a country with one of the shortest product cycles of any major market.
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