Saturday April 4, 2015 - 11:59:59 GMT
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Cross-Currents Slowing the USD Rise
by John M. Bland
Markets were blindsided by weaker than expected March U.S. jobs data in a holiday-shortened session Friday. Street estimates had been for an increase in employment in the month of about 250,000 jobs, but there was a gain of only 126,000 and an unemployment rate of 5.50%. Economists also indicate that the "internals" of the data were weak as well. Many have been using monthly gains of 200,000 in jobs as a yardstick for acceptable economic growth. The dollar fell on the news as the data calls into question an early hike in U.S. interest rates.
Markets Discounting Mechanism
Forex markets price expected future events into the spot rate. Rates for forward delivery are not a forecast of future rates. They are the cost of future delivery tacked onto the current spot rate. Future expectations (economic, political, etc.) are all priced into the current spot rate. This is why traders are highly sensitive to what central bankers have to say after their regular meetings. Forex is all about money flows from one currency to another. It is the role of central banks to manage the supply and "cost" of money (interest rates). Their decisions directly impact those flows.
As traders we try to anticipate what the markets will be discounting in the immediate future. Central Banks set policy based their expectations for economic growth, inflation etc., so we are always looking at data to see how economies are performing relative to one another. I find the monthly Purchasing Manager Surveys (PMI) released monthly to be a useful tool for comparing the relative strength of key economies. In my analysis, I prefer to use the manufacturing PMI data because it tends to be more sensitive to the business cycles and I use three month moving averages to smooth out some of the noise in the monthly data, while keeping it reasonably current.
What the Data Say
Some of data are saying that the U.S. economy is starting to slow. Another U.S. PMI survey (not on this chart) shows the economy may be improving. The harsh winter of 2015 might have distorted one survey more that the other, so we are being cautious about drawing strong conclusions. The chart shows that the U.K. has started to advance again, Japan is flat and that the Eurozone has started to improve. These observations are supported by other data.
In either case, traders are aware that Europe is starting to improve and are aware that the European Central Bank (ECB) very recently has hit the accelerator to stimulate economic growth in the Euro-area. We have seen the rally strongly in anticipation of stronger growth, and this anticipation has very recently started to temper the USD rise vs. the EUR. If sustained, these data have positive implications for the GBP and are negative for the JPY.
Over the weekend, Australia and New Zealand will turn their clocks back by an hour. The week ahead gets off to a slow start with most European centers closed for the Easter Monday holiday. The early portion of the week will see Service PMI data for March which have been delayed by Easter holidays. The week sees central bank decisions from the Reserve Bank of Australia, Bank of Japan and the Bank of England. Most expect policies to be kept steady. The focus at the present time for most central banks is their policy biases. A key focus on Friday will be Canadian Employment data.
Be sure to refer daily Global-View to see the continuously UPDATED Economic Calendar and the Forex Forum for the complete list of key items (actual data, selected charts, etc.) as they are released.
John M. Bland
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