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FXCM - Non-Farm Payrolls Could Do Little to Reverse Dollar Sentiment

DailyFX Fundamentals 05-04-06

By Kathy Lien, Chief Strategist of

• Non-Farm Payrolls Could Do Little to Reverse Dollar Sentiment
• Trichet’s Comments Has Markets Toying Between 25 or 50bp Hike in June
• China Reiterates Refusal to Budge on Yuan

US Dollar

Over the past two and a half weeks, we have essentially seen the demise of the dollar. The mighty greenback sold off 600 pips against the Euro, 500 pips against the Japanese Yen and a whopping 1000 pips against the British pound. In fact, the dollar has now given back over 50 percent of its 2005 gains and is on the path to lose even more. By now, everyone should realize the power that the G7 meetings have on the markets. As we have warned on the Monday following the G7 announcement, the initial drop was just a precursor to an even bigger move. Back then, we took a look back at the 2003 G7 meeting in Dubai, where the knee jerk reaction was a mere 150 pip slide in the EUR/USD but over the next few months, the currency pair lost another 11 percent of its value or a total of 1100 pips. Putting that into perspective, it seems that even though the dollar’s weakness seems to be overextended, it could fall even further. In 2003, there was only one retracement in the EUR/USD that could have given traders an opportunity to buy on dips, but otherwise, the move was almost a perfectly clean 45 degree angle. With ECB President Trichet’s comments out of the way, the market can turn its full focus on tomorrow’s non-farm payrolls report. Jobless claims were slightly higher today while the online employment index dipped for the first time in four months. However, both of these reports are coming off of healthier levels and conflict with other reports that have been signaling strength such as the employment components of the ISM surveys and details from payroll service provider ADP. Triple digit gains are certainly expected with the market consensus holding steady at 200k. With no major strikes last month, it seems that nothing should hold back a stronger report. Yet whether the market will respond to a good number remains questionable. The payrolls number probably needs to come in at least 50k over or under the market’s forecast to have a meaningful impact on the dollar. Even though non-farm payrolls are traditionally a very market moving number, traders have done a phenomenal job of ignoring anything dollar positive. A great example is today’s sharp slide in oil prices. The dollar should have responded positively to the weakness as well as the big jump in unit labor costs and non-farm productivity, but it didn’t. So along that line, it could very well shrug off an in line non-farm payroll report as well.


As we have promised, because the market was divided on what stance the European Central Bank President Trichet was going to take on interest rates, there was nice volatility in the EUR/USD today. The currency pair broke above its previous high and climbed to the highest level that we have seen since May 13, 2005, which was nearly one year ago. The central bank left interest rates unchanged at 2.50 percent, which was as expected, but Trichet started his press conference by reiterating the central bank’s need to maintain “strong vigilance,” citing oil as the main culprit. He still believes that the economy will continue to grow as planned but it is clear that their fear for inflation seems to be overriding the central bank’s fear for what a strong Euro could do their economy. Dutch Finance Minister Zalm and German Deputy Finance Minister Mirow both said that they are not concerned about the Euro’s recent rise, but if it continues to appreciate, they could become worried. Trichet’s use of the word “strong” confirms our belief that the next rate hike will come in June. Afterwards, if economic data continues to strengthen or inflationary pressures increase, the ECB may feel compelled to bring rates even higher. One last point to note is that the word “strong” has caused some to believe that the ECB would deliver a 50bp hike instead of a 25bp hike next month. We think that it is unlikely since the central bank has never before raised rates by more than 25bp at a time. Shifting gears to economic data, reports released this morning were mixed. The drop in retail sales in the month of March caught the market by surprise and raised concerns for domestic demand while service sector PMI echoed the improvement that we saw earlier this week in the manufacturing sector.

British Pound

The British pound continues to perform exceptionally well against the US dollar. It is worth noting again that the currency has risen over 1000 pips against the US dollar in the past 2 weeks. Like the ECB, the Bank of England also left interest rates unchanged. However stronger economic data helped to fuel gains in the currency. According to HBOS, house prices rose a more than expected 2.0 percent in the month of April while the service sector PMI index increased from 57.4 to 59.7. This follows the equally strong rise reported in the manufacturing sector survey earlier this week. Mortgage approvals remained steady, rising from 114k to 115k, but the only wrinkle in the day’s reports was a weaker rise in net consumer credit. Overall, today’s data tell us that the housing market remains steady and both activity in both the service and manufacturing sectors have been improving.

Japanese Yen

With exporters having done their hedging on Monday, the yen continued to give back gains against all of the majors except for the US dollar, which is a trend that we are no long surprised to see. Attempted verbal intervention by Japan’s Finance Minister has done little to help bolster the yen. We wonder if a rebound in USD/JPY will not come until exporters return from their holiday next week and reverse their hedges. Meanwhile it seems that China is standing firm on not succumbing to international pressure by raising the value of the Yuan. Instead, they have chosen to take measures that would boost domestic demand and free up their markets. China’s Vice Finance Minister Li argued that a rapid appreciation in the Yuan would hurt the countries exports, imports, agriculture, and industry along with many other aspects of the economy. They also feel along with some US analysts that their large imbalance with the US is not completely their fault. Therefore they returned the pressures by calling for the US to take its own measures to boost savings and cut demand for exports.


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