| Why the Limited Reaction to Payrolls? |  |  |
| Daily Forex Fundamentals | Written by GFT | Dec 06 08 04:45 GMT | | |
TODAY'S BIGGEST PERCENTAGE MOVERS
THE STORIES IN THE CURRENCY MARKET
EXPECTATIONS FOR UPCOMING FED MEETINGS
** PERCENTAGES MAY NOT ADD UP TO 100% BECAUSE OF THE PROBABILITY OF LARGER OR SMALLER MOVES BEYOND THOSE SHOWN ON THIS TABLE US DOLLAR: WHY THE LIMITED REACTION TO PAYROLLS?The US unemployment rate soared to a 15 year high in the month of November as non-farm payrolls incur the steepest slide in 34 years. Although currencies and equities sold off aggressively following the release of the labor market numbers, they clawed their way back to end the US trading session in positive territory. In the face of economic data that screams severe weakness for the US economy, the fact that currencies and equities recovered are nothing short of impressive. The counterintuitive price action in the financial markets makes us very skeptical of believing that the recovery is here to stay. There was nothing good in the jobs number and when it comes to the labor market, there is no such thing as a capitulated bottom. The only explanation for today's recovery in equities and currencies is the market's increasing immunity to bad news. The 8140 level in the Dow and the 815 level in the S&P seem to be very important support levels. They have held all week and were also major points of support in October. Non-Farm Payrolls Drop 533k, Unemployment Rate Climbs to 6.7% The headline non-farm payrolls figure for the month of November was very weak, but the downward revisions to the October and September data made the report even weaker. The US economy lost 533k jobs last month, a number that was worse than the most pessimistic economist had estimated. The October and September numbers were both revised down by more than 100k. Instead of losing 240k jobs in October the US economy lost 320k while the September number was revised from -284k to -403k. This string of job losses is the worst since the 1981 to 1982 recession on a population adjusted basis and on an absolute basis, last month had the largest level of job losses since payrolls declined by 602k in December 1974. Anyone looking at these numbers will agree that the US labor market is in very bad shape because no industry has been spared from job losses. Although average hourly earnings increased, workweeks have been shortened. Since the beginning of the year, 1.911 million Americans have lost their jobs. Yesterday's layoff announcements from AT&T, DuPont and Viacom suggest that major job losses will only continue. In every recession, we have seen months where hundreds of thousands of jobs lost were followed by a month of negative non-farm payrolls in the tens of thousands of jobs. However do not mistake the inevitable slowdown in job cuts with a bottom because a bounce in past recessions tends to precede an even larger single month job loss. Retail Sales and ZIRP are the Consequences of the Abysmal NFP Number The dollar has given back its gains as the equity market recovered, but despite the rebound in equities and high yielding currencies, there are 2 very real consequences of today's ugly non-farm payrolls number. The first is consumer spending – the November retail sales report is due for release on Friday and major job losses will make it very difficult for consumers to spend. Even though Black Friday sales were stronger than last year, same store sales fell by the most in 39 years, confirming our belief that consumers cut back significantly last month. Next Friday's retail sales report is also the most important piece of US economic on the calendar and we expect the number to tell us that consumer spending has contracted for the fifth consecutive month. The prospect of weak retail sales could prevent a meaningful recovery in USD/JPY. Today's NFP number also increases the pressure on the Federal Reserve to take interest rates down to zero. Will the US Dollar Become the Lowest Yielding Currency in the World? Fed fund futures are already pricing in a greater chance that the central bank will cut rates by 75bp on December 16th than 50bp. That would bring US interests down to 0.25% and turn the US dollar into the lowest yielding currency in the developed world. Since Japan's interest rate is currently 0.3%, if the US takes rates below Japan's levels we could see a downward adjustment in USD/JPY. At this point, taking interest rates to zero may only have limited impact on the financial markets because short term yields are already trading near those levels. Beyond that comes quantitative easing and in many ways, the Federal Reserve's latest announcements about buying Fannie and Freddie debt already constitutes quantitative easing. However there is hope as the continual decline in oil prices will help to cushion the blow of a softening economy for US consumers while the prospect of 4.5 percent mortgage rates could help to reinvigorate the housing market. In addition to the retail sales report, we also expect pending home sales, the trade balance, producer prices and the University of Michigan consumer confidence survey from the US this week. USD/CAD: BANK OF CANADA EXPECTED TO CUT RATES TO 1.75%The volatility in the US equity market can only be matched by the volatility in the Canadian dollar. Significantly weaker than expected Canadian employment numbers and the 5th consecutive day of losses in oil prices drove the Canadian dollar to a low of 1.30 against the US dollar. However as the US trading session progressed, the loonie recovered aggressively to end the day stronger than the greenback. Employment fell by 70,600 in November, the largest single monthly decline in 26 years. Although the number may seem small on an absolute basis, if we normalize it, the job losses would be comparable to US levels. With that in mind, the Bank of Canada is expected to cut interest rates on Tuesday to 1.75 percent from 2.25 percent. The Canadian government has been pretty adamant about finding ways to stimulate the economy. In addition to the rate decision, the Canadian trade balance and housing starts are also due for release in the coming week. The Australian and New Zealand dollars gained strength today thanks to the remarkable recovery in US equities. Australian employment and New Zealand retail sales are the only pieces of data worth watching from those 2 countries in the coming week. EUR/USD: WILL IT REMAIN IMMUNE TO WEAK DATA?The euro is the one currency that has remained unfazed amidst this week's market volatility. Since the beginning of November, the EUR/USD has been stuck between the 1.25 and 1.30 trading range and this range continued to hold after the European Central Bank delivered its largest interest rate cut ever. The resilience of the Euro has been puzzling and it will be interesting to see if the currency can remain immune to next week's economic data. Factory orders fell 6.1 percent in October, which was the largest drop ever. This decline suggests that industrial production will see a similar fate on Monday. The German trade balance and ZEW report of analyst sentiment are also due next week and given the recessionary conditions in the Eurozone, the numbers should not be supportive of the euro. Although the ECB cut interest rates by 75bp this past week, the Eurozone actually has the highest interest rate of the G7 currencies and that may be the reason why the Euro has not broken 1.25. Meanwhile Switzerland has an interest rate decision on Thursday. The central bank has been very aggressive in making intermeeting rate cuts. Most recently, they cut interest rates by 100bp to 1 percent. Further rate cuts are expected from the SNB, but since they just cut interest rates on November 20th, there is a chance that they may forgo cutting interest rates again on December 11th. The Swiss franc was the worst performing currency today. BRITISH POUND: MAY CONTINUE TO UNDERPERFORM THE EUROAfter selling off for four consecutive trading days, it was not surprising to see a relief rally in the British pound. The only question is will this recovery last. The Bank of England cut interest rates by 100bp this week and the price action of the pound going into the meeting suggests that the central bank's decision to take interest rates to 2 percent was already priced into the market. The UK has the fourth lowest interest rates in the developed world and the fact that it offers a yield less than the Eurozone is reflected in EUR/GBP, which rose to a record high this past week. The economic calendar remains busy for the UK with producer prices due for release on Monday, followed by the trade balance and house price report on Tuesday and the GDP estimate on Wednesday. RECOVERY IN DOW TAKES YEN CROSSES OFF OF MULTI YEAR LOWSThe Japanese yen has had a roller coaster of a day as it tracks the US equity markets. The extreme swings in the Dow from the depths of negative territory to positive have led to a strong recovery in the Yen crosses. In fact, CAD/JPY had fallen to an 8 year low, GBP/JPY to a new 13 year low and NZD/JPY to a new 7 year low before turning positive. The economic calendar for Japan is busy next week with the Trade Balance and Current Account due on Sunday, Eco Watchers Survey and GDP on Monday, and the Leading Index and Corporate Goods Price Index on Tuesday. The unavailability of credit is presenting huge problems for Japan's recovery prospects. This is leading the search for new economic stimuli to jump start the economy. One such strategy was announced today and involves legislation that would eliminate taxes on repatriation of corporate profits made abroad. These attempts are desperately needed as monetary easing has been largely taken off the table. GBP/USD: Currency in Play for MondayGBP/USD will be the currency in play for Monday. The UK are scheduled to release their Producer Price Index at 4:30 am ET or 9:30 GMT. The PPI is subdivided into prices for both the inputs and outputs. Technically, GBP/USD is still within the Bollinger band sell zone, despite a rally attempt. Prices found resistance at the one standard deviation Bollinger band. The currency pair will need to close above the band to negate the downtrend. The previous low of 1.4467 serves as significant support. A break of this level will see the pair edge toward a low placed in 2001. This 1.3682 low, despite being a sizeable distance from current price action, represents a multi-decade low extending back to 1985. With the sizeable moves in today's currencies, anything is possible. If the pair manages to break back into the range trading zone on the other hand, resistance is at 1.50, which is a psychological level and the confluence of the 10 and 20 day Simple Moving Averages.
Kathy Lien | |
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