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Thursday April 6, 2006 - 20:17:56 GMT

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FXCM - Non-Farm Payrolls – Should We Believe Treasury Secretary Snow?

DailyFX Fundamentals 04-06-06

By Kathy Lien, Chief Strategist of

1) Non-Farm Payrolls – Should We Believe Treasury Secretary Snow?
2) Euro Sells Off After Trichet Suggests That the Next Rate Hike Will be in June Not May
3) Yen Sells Off as Oil Hits 2 Month High

US Dollar - The US dollar has recovered nicely ahead of tomorrow’s non-farm payrolls report. At a time when the market has been doubting the Federal Reserve’s optimism, the dollar really needs a strong payrolls number in order to extend its current rally. In fact, much of the strength that we have seen today represents position adjustments following comments from the European Central Bank rather than traders positioning for a good payrolls number. The current forecast is for 190,000 jobs to have been created last month compared to 243,000 jobs created the month prior. With less than 24 hours to go before the payrolls number is released, the question that lies ahead of us is do we believe what the US Treasury is hinting or do we believe the data. Yesterday, Treasury Secretary John Snow said that the upcoming March employment report should show “some good numbers.” Is he telling us that payrolls could easily exceed expectations? According to many bank analysts commenting on his optimistic view, the BLS probably did not have the entire nonfarm data tabulated when Snow made his comments. However when he made the same comments in April 2004, the accompanying non-farm payrolls report came close to doubling expectations. The recent economic data released suggest that if there is a surprise, it would most likely be to the downside. The employment components of both the ISM manufacturing and non-manufacturing reports deteriorated in March, as did that of the Philly Fed survey. However the employment component of the Chicago PMI report rebounded after declining three out of the past four months. Job growth will also have to contend with a strike that took away 6,200 jobs last month, while the market is talking about a tiny report called the Hudson Employment Index which reported a dip in hiring in the month of March. Yet don’t be confused, triple digit gains are still expected with jobless claims averaging at a low 310k level. In fact, claims came in much better than expected today, rising by a mere 299k. They are just not expected to be as high as the February figure, when we had jobless claims average at 290k. Signs that payrolls will still be a respectable number come from the rise in the current condition components of the confidence surveys and the 25 percent dip in layoff announcements reported by Challenger, Gray and Christmas. It is also worth noting that gold prices broker above $600 an ounce before settling lower while oil prices are trading at 2 month highs. This has been very positive for the Australian and Canadian dollars.

Euro - For once in a long time, we have European related developments driving market activity and not US developments. The European Central Bank left interest rates unchanged this morning at 2.50 percent. The move was widely expected but what was not expected were the tamed down comments from ECB President Trichet. Leaving no room for misinterpretation, Trichet said that the “ECB’s view is not in line with the market’s view for a May hike.” He also added that it is a misconception that the ECB does not act when they have meetings outside of Frankfurt. This comment is pointed directly at the June meeting which will be held in Madrid. The ECB is only scheduled to have two meetings this year outside of Frankfurt. Rate hikes still seem to be the path that the central bank will proceed on, especially since they believe that inflation risk remains to the upside and that “interest rates are still very low and accommodative.” However, what Trichet suggested today is that the next rate hike will not come until June. Furthermore, he confirmed that the word “vigilance” was left out of the statement on purpose. With the recent rally in the Euro, the comments from the central bank today illustrate how sensitive they are to exchange rates. The stronger the Euro gets, the more the ECB may have to delay their plans to raise interest rates. Nevertheless, if US non-farm payrolls come in weaker tomorrow, the market will interpret the latest Euro sell-off as nothing more than a retracement within a broader uptrend. In today’s data releases, consumer spending seem to still be the Eurozone’s weak point. Retail PMI deteriorated in the Eurozone, led by contractionary conditions in France, Germany and Italy. In fact, Germany and France both fell into contractionary conditions after having expanded in January. On a side note, German industrial production and manufacturing orders, which were originally scheduled to be released tomorrow will be delayed until at least April 24 due to a strike in one of the country's 16 federal states.

British Pound - The British pound weakened against the dollar today but recovered some of its losses against the Euro. House prices continued to tick higher in March according to Halifax, who reported a 0.9 percent rise last month. However, as with the recent trend in UK data, each piece of good news is met with another piece of bad news. The NIESR reduced their GDP estimate for the 3 months ending March from 0.7 percent to 0.6 percent. Such divergent data is one of the primary reasons why the Bank of England elected to leave interest rates unchanged once again this morning at 4.50 percent. The UK is done for the week with no more releases scheduled tomorrow. This means that for the next 24 hours, the pound’s value will be dictated by how the US labor market performed last month.

Japanese Yen - The Japanese Yen was unable to extend the recovery that it made yesterday in the US trading session despite the fact that the equity market hit a 15 year high this morning (in the TOPIX). The strong rally in stock market indicates that foreign investors continue to pick up Japanese investments as the country moves forward with its recovery and the central bank leans more towards raising interest rates. Domestically however, Japanese investors are still sending money out of the country, offsetting the inflow. The country is also suffering from the continual rise in oil prices following the report of supply shortages yesterday. Japan imports nearly all of its oil, making them particularly sensitive to the commodity’s prices.


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