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Forex Market News- Strong US Job Growth Delays Any Chance of a Fed Rate Cut

FXCM - DailyFX Fundamentals 04-06-07

By Kathy Lien, Chief Strategist of

• Strong US Job Growth Delays Any Chance of a Fed Rate Cut
• ECB President Trichet Could Signal Plans to Raise Rates in May or June
• EUR/JPY Hits a Fresh Record High

US Dollar – The “leading indicators” for non-farm payrolls correctly forecasted exceptionally strong job growth in the month of March and the dollar has skyrocketed in response. In our non-farm payrolls preview, we had said that “all the market needs now is a strong payrolls number to indicate that economic growth is chugging along,” and now, they have it. US companies added 180k jobs to their payrolls last month, which was 50k more than the market was expecting while jobs created in the month of February were revised higher by 16k. The tighter labor market helped to drive the unemployment rate down to 4.4 percent, which is the lowest level since 2001. The other details of the report gave traders no reason to question the strength of the labor market. Average weekly hours increased by 0.5 percent while average hourly earnings grew by 0.3 percent, which was right in line with expectations. The labor market is the backbone of the US economy and as long as people have jobs, they will be far less worried about any contraction in the housing market because at bare minimum, they will be able to pay their mortgages. This will keep interest rates at 5.25 percent and delay any potential rate cut to the fourth quarter. With most markets around the world closed for the Good Friday holiday, the reaction in the currency market was sharp and fast. By 10am, which was right around the close of FX and Interest Rate futures on the CME, trading had grind to a halt. With such a blockbuster number, the Sunday / Monday market open could be exceptional volatile as the rest of the market reacts to the strong report. There is a decent chance for follow through at the open as traders initiate positions. Looking ahead there is a number of Federal Reserve officials scheduled to speak next week. Most of them have remained hawkish for some time, but their comments are now validated by data. In general, the Fed believes that the problems in the sub prime sector have not spilled over into the rest of the housing market and for the time being, upside inflation risks remain a bigger problem. This should keep the dollar in demand as we head into a relatively light data week. The only noteworthy data on the calendar are the producer prices and trade balance reports. We also have event risk, namely the Finance Ministers G7 meeting and the release of the minutes from the Fed’s most recent monetary policy meeting.

Euro – German and French markets were closed today which explains why the only meaningful movement that we saw in the EUR/USD today was between 8 to 10 am EST (European markets will remain closed on Monday). Before and after that, the EUR/USD remained confined within a very tight trading range. The only piece of economic data from the Eurozone was the OECD’s release of leading indicators, which remained unchanged at 109.3 for the month of February. In the week ahead, there are far more Eurozone data than there are US data on the calendar. The most important of which is the European Central Bank’s interest rate meeting. Even though rates are not expected to be changed, it will be very important to tune into Trichet’s accompanying press conference. The last time he spoke, he omitted the words strong vigilance from his speech, which indicated to the market that he wasn’t going to follow up the March 14th rate hike with another hike in April. However, rates could be raised in May or June, especially since ECB officials have remained staunchly hawkish. Aside from the ECB meeting, Germany will also be releasing its current account balance and trade balance. France has industrial production, trade and consumer prices due for release. The European Commission will be publishing their first to third quarter GDP forecasts while the Eurozone reports industrial production.

British Pound – Like the European markets, the UK markets were also closed for Good Friday. The British pound underperformed against the US dollar for no reason other than the release of the strong US non-farm payrolls report. The only piece of news from the UK was the National Institute of Economic and Social Research’s (NIESR) comments about growth. They said that economic growth probably slowed due to the slower expansion in the service sector. Looking ahead, even though the UK economic calendar is light, the data that they will be releasing next week will shed new light on how many areas of the UK economy are doing. We are expecting BRC retail sales, leading indicators, the RICS house price balance and the trade balance reports. Despite the Bank of England’s decision to leave interest rates unchanged this past week, economic data has been decent. However, traders looking to buy British pounds should be cautious because the technical setup is very unfavorable as the weekly charts reveal a clear shooting star candlestick formation.

Japanese Yen – The Japanese Yen sold off against the majors despite slightly stronger economic data. Official reserves hit an all time high while the coincident index tripled expectations. Despite the upside surprise, both the leading and coincident economic indexes deteriorated from the prior month, indicating that the economy has worsened. Furthermore, the Yen hit a fresh year to date low against the US dollar and hit a fresh record high in EUR/JPY. This will certainly spur speculation that the Yen could be singled out at the upcoming G7 meeting. Japan has denied this possibility, but it is nevertheless one. The Bank of Japan has a monetary policy announcement on Tuesday where no rate changes are expected. They also have the current account, consumer confidence and CGPI due for release.

Commodity Dollars (AUD, NZD, CAD) – Stronger US economic data has also hit the Australian and New Zealand dollars, while the Canadian dollar remained virtually unchanged. The commodity markets were closed and there have been no economic reports from any of these countries. In the week ahead, the few pieces of data from the commodity bloc happen to be fairly important. Australia will be releasing its employment data along with the housing finance report. New Zealand will be reporting retail trade while Canada will be releasing its housing starts, new home price index and trade balance. Bank of Canada Deputy Governor Kennedy will also be speaking about monetary policy on Thursday. With the Canadian economy performing very in the recent month, it will be interesting to see if the central banker hints at any possibility of a rate hike.


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