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Dollar Rallies As Unemployment Rate Falls To Lowest Level Since October

DailyFX Forex Fundamentals 09-03-04

By Kathy Lien, Chief Strategist of

·Dollar Rallies As Unemployment Rate Falls To Lowest Level Since October
·Softer Eurozone Service Sector data
·Central Bank Meetings and GDP Reports Flood Calendar For Next Week


The euro took a nosedive after US non-farm payrolls rebounded in the month of August. Although the absolute increase in payrolls were less than the market’s consensus forecast, traders were nevertheless relieved to see a resumption of triple digit gains. Furthermore the unemployment rate dipped to 5.4%, which is the lowest level since Oct 2001, as June and July payrolls were revised upwards by more than 50%. Highlighting the underlying strength in the data, average hourly earnings increased last month while the average workweek was revised upwards in July. The gains in employment were generally broad based, with 108k jobs coming from the service sector and 36k jobs from the manufacturing sector. There is a general consensus that this report essentially seals the case for a September rate hike. Meanwhile Eurozone service sector PMI was softer than expected, dragged down by weak activity in Germany. Retail sales for the region was stronger than expected with higher German and Spanish retail sales offsetting weakness in France.


With non-farm payrolls stealing all of the limelight, the dollar completely shook off a much weaker than expected non-manufacturing ISM survey. The service sector index fell to 58.2 from 64.8; the market had expected only a modest decline to 62.8. The lack of reaction in the dollar is most likely a result of the optimism surrounding the rise in the employment component of the report. Seven out of the nine indexes deteriorated with the biggest shortfall coming from the fall in new orders. Although Monday is a holiday in the US (we will be in the office but not be publishing), once Tuesday rolls around, we begin a very busy week with central bank meetings and GDP reports filling up the economic calendar. Five central banks are meeting to discuss monetary policy (RBA, RNBZ, BoJ, BoC, BoE) – Canada and New Zealand are the only central banks expected to raise rates. For the US and probably the currency market as a whole, the key event next week is Greenspan’s testimony on Wednesday on the economy and fiscal outlook. Given the rather robust payrolls report and the recent pullback in oil prices, Greenspan will most likely remain bullish and reiterate his view that the current risks to the economy are based upon transitory or “temporary” factors.


Today’s positive US data forced the mighty pound to break the downside of its recent range. Mixed data from the UK failed to have any meaningful impact on the GBPUSD during the early European trading session. The service sector’s PMI report increased to the highest level since May. The most notable gains were in business expectations, prices charged and input prices. This suggests that service firms have been passing higher costs over to consumers. However, the Financial Times house price index negated any optimism that may have been caused by this report. It is the latest piece of evidence this week confirming the slowing housing market, which is particularly important in the week ahead with the Bank of England convening to discuss monetary policy. Given the latest evidence of slower growth in the housing market and the economy as a whole, the BoE has ample flexibility to hold off hiking rates this month. Aside from the monetary policy meeting, retail sales, industrial production, and the trade balance are all highly anticipated releases next week.


Today’s dollar supportive data helped USDJPY to break out of its recent slump. According to the data released overnight, household spending increased 1.1% in the month of June. Household spending is an important measure of consumption, which accounts for over 50% of GDP. The final release of second quarter GDP due out on Thursday is expected to be revised down to 0.6% from 1.1%. Also important will be Monday’s capital spending report from Japan, as it will shed additional light into the size of the downward revision of GDP. The Bank of Japan will be convening to discuss monetary policy next week. As suggested by BoJ Governor Fukui this week, the central bank is “behind the curve,” but happily so. Their strategy is to provide enough stimulus to the economy to solidify the current economic recovery.


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