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Friday August 6, 2004 - 13:37:19 GMT -

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Dollar Tanks On Non Farm Payrolls - They Are Wrong Again

DailyFX Forex Fundamentals 08-06-04

By Kathy Lien, Chief Strategist of

· US Non-Farm Payrolls Report – Only 32k Jobs Added in July
· German Industrial Production Weakest in 10 Months
· UK Personal Insolvencies Reach Record High

EURUSD - The euro skyrocketed as the forecasts for July’s non-farm payrolls report were once again significantly off target. For our avid readers, on Tuesday, we put out a report titled “Non-Farm Payrolls – Will They Be Wrong Again?” And clearly, they are. All evidence listed in our article (ISM, PMI, Help Wanted Ad, index) pointed to a weaker job picture. Coming in below even the most pessimistic forecast of 170k, only 32k jobs were added onto July payrolls. To top that off, payrolls in the month of June, were revised lower from 112k to 78k. Taking a look at the details of today’s report, we attempt to make some interesting speculations. Jobs were lost in the trade transport sector, the financial sector and the leisure/hospitality sector. This leads us to question whether this can all be tied back to higher oil prices. Jobs could have been slashed as transportation service companies incurred higher input costs. Consumer discretionary spending has declined as a result of higher costs for gasoline, which would inevitably hurt the travel industry. Higher interest rates, and the declines in refinancing could have taken a toll on the financial sector. Meanwhile, the manufacturing sector, which was previously a primary concern, saw an addition of 10k jobs in June. The unemployment rate did improve from 5.6% to 5.5%, which is the lowest since October 2001 (more in USDCHF section). Meanwhile, in the month of June, German industrial production fell by a more than expected 1.9%, which is also the largest decline in 10 months. Although consensus forecasts did not change, the market had prepared for the worse following yesterday’s disappointing factory orders report. As suggested by yesterday’s report, the decline was a result of falling foreign demand. Given that domestic consumption has been exceptionally weak, Germany has been relying solely on an export-led recovery. If foreign demand begins to evaporate, there is then a very viable risk that the largest country in the Eurozone could tip back into recession.

USDCHF - Today’s non-farm payrolls number was very weak. The report indicates that as of June, the US economy is barely creating jobs. This creates significant confusion ahead of next week’s FOMC rate decision. With an extremely accommodative monetary policy, the market had expected the Fed to immediately follow the June rate hike, with another 25bp of tightening, especially given Greenspan’s hawkish testimony a few weeks ago. However, with the release of today’s data, expectations have declined significantly. August Fed fund futures are now pricing in an implied rate of 1.40% - indicating that not everyone in the market now believes that we will see another round of tightening next week. Aside from the FOMC rate decision, in the week ahead, we are expecting retail sales, the trade balance and inflation data.

GBPUSD - More mixed data poured out of the United Kingdom as personal insolvencies reached a record high in the second quarter. This comes in the wake of alarmingly high consumer indebtedness. Insolvencies rose 7.9% against the first quarter, bringing the total level of consumer debt to approximately $1 trillion pounds. Corporate insolvencies on the other hand declined from a revised –14.6% to –17.4%. With so much mixed data out of the United Kingdom in the past week, it is important to watch whether this trend continues. Next week, we have a lot of important economic data slated for release from the UK including inflation, more housing market data, retail sales, unemployment and the trade balance. If the data continues to come out mixed or biased towards the downside, demand will probably roll out of the pound. Over the past 2 years, the pound has been one of the darlings in the currency market, with strong growth, relatively higher interest rates and tight capacity. Even though many of these conditions still exist, as the rest of the world catches up, market participants are expected to shift their focus to countries who are just beginning to tighten, rather than those who have tightened numerous times since the beginning of the year.

USDJPY - Japanese household spending fell a more than expected 4.0% m/m and 2.6% y/y. Falling wages has caused spending to fall for the second consecutive month. If you recall, in the month of June, labor cash earnings declined by 2.4%. Despite being repetitive, we cannot stress the importance of the impact of rising oil prices on the Japanese yen. Although the government left their economic assessment unchanged in their August monthly report, they did raise concerns that oil prices need to be monitored closely in fear of denting the economic recovery. Exacerbating the concerns about oil was a report released by Nikko Citigroup yesterday. The report said that Japan’s economy might be particularly vulnerable to higher oil prices because companies have only a limited ability to pass on higher costs to consumers. Meanwhile, the Nihon Keizai Shimbun reports that according to UFJ Institute, the end of quantitative easing may be delayed until 2006. They expect the economy to fall into a corrective phase in the second half of the current fiscal year. It would not be surprising if the slowdown came as a result of the damaging effects of higher oil prices.


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