Friday August 3, 2007 - 18:47:04 GMT
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Forex - British Pound Breaks 2.04, Quarterly Inflation Report Expected Next Week
DailyFX Fundamentals 08-03-07
By Kathy Lien, Chief Strategist of DailyFX.com
Will Weak Payrolls and ISM this Force the Fed to Drop their Inflation
Bias Next Week?
Euro Benefits from Deteriorating US Outlook for US Economy
British Pound Breaks 2.04, Quarterly Inflation Report Expected Next Week
Will Weak Payrolls and ISM this Force the Fed to Drop their
Inflation Bias Next Week?
Bad news begets bad news which
begets even more bad news. This is why
both the US dollar and the Dow are lower in Friday trading. This morning, we had much weaker than
expected non-farm payrolls. Despite a
sharp rise in consumer confidence and a drop in average weekly jobless claims, US
corporations only added 92k jobs onto their payrolls, which was the weakest
level since February 2007 and the third weakest in 2 years. This brought the unemployment rate up to 4.6
percent, the highest since September 2006 (for more details see our NFP
Instant Insight). The divergence
between jobless claims and non-farm payrolls indicates that even though
companies are not firing, they are also not hiring. With hedge funds and mortgage lenders blowing
up left and right, August could be ugly for the labor market. American Home Financial announced that they
will be cutting their staff from 7000 to 750, which is a loss of 6250
jobs. We are sure that they are not the
only ones to be downsizing. In addition
to American Home Financialâ€™s announcement and the bad non-farm payrolls number,
Standard and Poorâ€™s also cut its outlook on Bear Stearns to negative while
Wells Fargo raised its mortgage rates on 30 year jumbo loans from 6 7/8 percent
to 8 percent. The last piece of US data
released today was service sector ISM which dropped from 60.7 to 55.8. The fall in bond yields yesterday was an
accurate sign that we have yet to see the worst. Will there be respite next week? Possibly - the economic calendar is very light
and the only piece of US data with any market moving potential is the Federal
Reserveâ€™s monetary policy decision. Rates are expected to be left unchanged, but
as usual, the market will be focusing on the accompanying statement. Will the recent movements in the stock market
and endless troubles in the US
economy force the central bank to drop their hawkish inflation bias? The potential exists, but based upon the
latest Fed rhetoric, they are not ready to do so.
Euro Benefits from Deteriorating US Outlook for US Economy
Yesterday, ECB President Trichet
signaled to the markets that despite the recent slowdown in European growth,
they still have full intentions of raising interest rates next month. This of course is bullish for the Euro and
helped to take the currency higher against the US dollar. However the breakout in the Euro today was
more a reflection of the deteriorating conditions in the US economy than
the more promising outlook in the Eurozone.
We are currently in an environment where the Federal Reserve may have no
choice but to slowly downgrade their degree of hawkishness while the ECB is
expected to deliver one and possibly even two rate hikes by the end of the
year. Although service sector ISM in the
Eurozone was stronger than expected in the month of July, but retail sales for
the region was weaker. Like the US,
the economic calendar is relatively light.
German factory orders, industrial production, the trade and current account
balances are the only pieces of data that are potentially market moving and
even then, they are second tier data. All
of these reports reflect aspects of the Eurozone economy that may be affected
by the strength of the Euro. Therefore a
downside surprise is far more likely than an upside one. Meanwhile, the Swiss franc rallied significantly
today despite a drop in consumer prices.
With gold prices up sharply, this may reflect flight to safety. Swiss unemployment and the SECO consumer climate
reports are due for release next week.
Overall, the Swiss economy has been doing very well, which is why we
expect both reports to be firm.
British Pound Breaks 2.04, Quarterly Inflation Report
Expected Next Week
It has been a strong week for the
British pound despite mixed economic data. Even though activity in both the manufacturing
and construction sector accelerated in the month of July, service sector
activity slowed. All of these indices
remain well above it comparative US levels, which is the reason why the
currency has outperformed the US dollar.
The Bank of England left interest rates unchanged, which made the rate
decision a non-event, but next week Central Bank Governor King will be
delivering their Quarterly Inflation Report.
Based upon the price action in the British pound, traders expect the
central bank to remain hawkish and signal the possibility of another rate hike this
year. Although this is the most likely
scenario, when it comes to the Bank of England, always be prepared for
surprises since the UK is
also being hit by the US
subprime problems. According to the
Council of Mortgage Lenders, foreclosures have hit an 8 year high.
Employment Reports Expected from Canada,
Australia and New Zealand
The Canadian, Australian and New Zealand
dollars are slightly weaker today. Canada released
much softer than expected IVEY PMI. Analysts
were already looking for a 7 point drop, but instead, the index dropped a
whopping 13.2 points. This indicates
that the strength of the loonie is finally having a big impact on the Canadian
economy. The drop in the employment
component of the report also suggests that next weekâ€™s employment numbers will
be weak. Australia
and New Zealand
will be releasing their own employment reports as well. The employment component of the stronger
Australian service sector PMI suggests that the labor should remain tight. The New Zealand labor market should
also hold steady.
Historical Movements of the Yen Crosses
Over the past week, the Japanese
Yen crosses have moved in lockstep with the Dow and today was no
different. With the exception of EUR/JPY
and CHF/JPY, all of the other Yen crosses gave back its prior dayâ€™s gains. The growing problems in the US continue to
weigh heavily on the marketâ€™s appetite for risk. Even though it may feel painful for carry
trades at the moment, the 3 percent that we have seen thus far is marginal
compared to how
much carry trades have moved historically.
There was not much Japanese Data to help the Yen this week but the week
ahead is more promising with a relatively busy Japanese calendar, which
includes the corporate goods price index.
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