FOREX TRADING

USD Higher, US Unemployment Rate Drops to 9.7%

• USD: Higher, unemployment rate posts an unexpected decline, nonfarm payrolls below expectation
• JPY: Lower, Toyotas CEO says the company is in crisis, risk recovers on better US employment report
• EUR: Lower, concern about EU fiscal troubles
• GBP: Lower, producer prices rise more than expected
• CAD and AUD: AUD lower & CAD higher, Canada’s unemployment rate drops jobs, growth rises by 43k

Overview

US January headline unemployment posted an unexpected decline to 9.7% from 10% last month and nonfarm payrolls dropped by 20k. The average workweek increased to 33.3 hours from 33.2. 8.4mln jobs have been lost since the start of the recession in December 2007 compared to the 7.2mln originally reported by the Labor Department. The number of long-term unemployed rose to 6.3mln. December nonfarm payrolls were revised to -150k from -85k, October nonfarm payrolls revised to -224k from -127 and November nonfarm payrolls were revised up 64k from up 4k. The US economy continues to shed goods producing and construction jobs with jobs increasing in services and retail.  Government hiring down slightly.  The USD initially pared overseas gains and the JPY traded lower after the release of better than expected US headline unemployment. USD resumed its rally as US equities traded lower and the unemployment report failed to lift market gloom. Despite the drop in headline unemployment the US still shed 20,000 jobs last month and the data failed to boost risk appetite.

Ahead of today’s release of US January unemployment the USD traded higher with the EUR trading at an eight month low. USD is supported by a spike in risk aversion sparked by concern about debt troubles in Europe and worries about the global recovery. European credit default spreads continued to widen. Expanding EU budget deficits are seen as a threat to the European recovery. Recent tightening of lending conditions in China generates concern about the global recovery. Risk aversion is the major driving factor for the financial markets and Forex trade. Report of a sharp decline in German industrial output adds to negative sentiment towards the EUR. EUR down side was limited by report of SNB intervention. The SNB is rumored to have intervened as the EUR/CHF cross traded at a 15 month low. GBP traded lower with downside limited by report of higher than expected producer prices in January. Commodity currencies traded mixed pressured by the spike in risk aversion with CAD downside was limited by report of an unexpected drop in Canada’s unemployment rate and stronger than expected jobs growth for Canada in January. The trade will continue to monitor the direction of equities to gauge risk sentiment with focus on EU response to the debt crisis.

Today’s US data:

January unemployment declined to 9.7%, a reading of 10.1% was expected. January nonfarm payrolls came in at -20k, a reading of 5k was expected.

Upcoming US data:

Next week’s US economic calendar includes the February 9th release of December wholesale inventories and sales. Inventories are expected to rise by 0.5% and sales are expected to rise by 1%. On February 10th December trade balance and the Treasury budget will be released. The trade balance is expected at -36.5bln, compared to -36.4bln last month. The Treasury budget is expected at -60.5bln, compared to 63.5bln last month. On February 11th initial jobless claims for week ending 02/06 will be released expected at 470k, compared to 480k last week. January retail sales and December business inventories will also be released on February 11th. The retail sales are expected to rise by 0.5%, compared to -0.3% last month. Inventories are expected unchanged at 0.4%. On February 12th February University Michigan consumer sentiment will be released expected at 74, compared to 74.4 last month.

JPY

After a volatile overseas session which saw the JPY trading higher and gaining in cross trade as global equity markets tumbled, JPY turned lower in US trade after the release of mixed US employment data. The unexpected decline in US headline unemployment helped to stabilize US equities and sparked a slight boost in risk sentiment. For most of the week the USD and JPY have been in the competition for safe haven flows sparked by concern about the global recovery and fiscal troubles in the EU. There also appears to be some fallout from the statement by Toyota’s CEO that the company is in crisis. JPY traded sharply higher Thursday supported by a weaker equity trade and a spike in risk aversion sparked by sovereign debt concerns in Europe. JPY surged in cross trade with AUD/JPY -3.7% lower and EUR/JPY – 2.8% lower. Part of the JPY surge was attributed to speculation that China may be more willing to allow the Yuan to be revalued. JPY sometimes trades as proxy for Yuan revaluation speculation. Chinese officials Friday said that China will continue to prevent the Yuan from rising because of concern about the global recovery. The driving factor for JPY trade is risk sentiment. Until the global equity and financial markets show signs of stability investors are unlikely to focus on the negative fundamental backdrop for the JPY which includes increasing deflation risk in Japan and concern about Japan’s deficits and sovereign debt rating. There was little reaction to report that Japan’s December leading indicator rose by 3%.

Next week’s Japanese economic calendar includes the February 10th release of January CGPI expected at -0.1%, compared to 0.1% last month. December machine orders will also be released on February 10th expected at 8.8%, compared to -1.3% last month. On February 16th December revised industrial output will be released expected unchanged at 2.2%.  On February 17th December tertiary activity will be released expected at -0.4%, compared to -0.2% last month.

Key technical levels to watch in USD/JPY include support at 87.35 the December 9th low with resistance at 91.28 the February 4th high.

EUR

EUR traded at an eight-month low pressured by concern about sovereign default risk in Europe. European credit default spreads continued to widen Friday as investors await news on whether the EU plans to bail out rising fiscal deficits in peripheral European countries like Greece, Portugal and Spain. Widening of credit default swap spreads in Europe sparked fresh concern about the risk of debt default in Europe. There is concern of a Lehman type fallout from rising debt risks in the EU and this has reduced the attraction of the EUR as a viable alternative to the USD as a reserve currency. There is a lot of talk about the fact that the ECB is presented with a difficult task of one size monetary policy fits all within the EU as the EU has monetary union but not political union. EU debt troubles are generating fears about default risk in the EU. Thursday the ECB officials indicated that EU debt troubles complicate ECB policy outlook and there is speculation that the EU debt worries will prevent the ECB from pursuing its exit strategy at this time. German industrial orders declined by 2.6% in December. The decline in German industrial orders generates concern about the EU recovery. EUR experienced a modest bounce after rumors of SNB intervention. The SNB was reported to have intervened to try to stop CHF appreciation as the EUR/CHF cross declined to 15 month low. EUR was back on the defensive after the release of mixed US January employment data as an early attempt to rally in US equities stalled. It’s difficult to predict how low the EUR may trade due to concern about sovereign debt risks in Europe. Some analysts expect possible EU and IMF bailouts to reduce concern about EU debt risks limiting EUR downside. Other analysts fear that the impact of the sovereign debt risk news from Europe has only scratched the surface. Developments in regard to fiscal stability in peripheral European countries will remain the main focus for EUR trade.

The technical outlook for the EUR is negative as the EUR trades below 1.3700. Expect EUR support at 1.3585 the May 29th low with resistance at 1.3905 the February 4th high.

GBP

GBP traded lower pressured by rising risk aversion sparked by EU debt worries and in reaction to Thursday’s BOE policy decision. Thursday the BOE elected to pause its asset purchases but left the door open for future expansion of quantitative ease if the economy deteriorates. In its policy statement the BOE said it expects a gradual recovery in the UK economy and that the impact of aggressive fiscal and monetary policy will have impact for some time to come. In the days leading up to today’s BOE policy meeting the BOE was faced with report of a sharp increase in UK inflation and mixed to relatively positive economic data. UK December CPI rose by 2.9% and manufacturing PMI hit a 15 year high. Friday, the UK reported a stronger than expected rise in producer prices. UK output prices for January rose by 0.4%, input prices rose by 2% and core output prices rose by 0.3%. The 2% jump in UK input prices will add to BOE concern about rising UK inflation risk. Input prices are 8.4% higher y/y. The import rise supports the BOE’s decision yesterday to pause in its asset purchase plan as the BOE’s pumping of liquidity in to the UK economy appears to be supporting growth and heightening the risk of inflation. GBP remains vulnerable to concern about UK debt outlook and upcoming general election.

Next week’s UK economic calendar includes the February 9th release of December trade balance expected at -2.883bln, compared to -3.032 last month. On February 10th December industrial production will be released expected at 0.6%, compared to 0.4% last month.

The technical outlook for GBP is negative as GBP trades below 1.5700. Expect near-term support at 1.5515 the May 21st low with resistance at 1.5920 the February 4th high.

CAD

CAD traded higher in reaction to better than expected employment data in the US and Canada. Canada created 43k in new jobs last month with the unemployment rate falling 0.2% to 8.3%. The trade had expected job growth of just 15k with the unemployment rate at 8.5%. US employment data was mixed with headline unemployment posting an unexpected decline and nonfarm payrolls posting a less than expected improvement. The unemployment reports helped to stabilize US equity market trade. Most of the job growth in Canada was attributed to temporary work which tempered the reaction to the Canadian unemployment report. Canada’s Finance Minister Flaherty said the deterioration Canadian unemployment has ended. Despite the improvement of Canada’s employment outlook the BOC is expected to maintain steady rate policy as Canadian economic reports remained mixed. Yesterday Canada reported that building permits rose last month by 2.4% and Ivey January manufacturing index came in weaker than expected 50.8%. The trade was looking for a reading of 52.5 in the Ivey PMI. Last week Canada reported stronger than expected GDP but BOC Governor Carney warned that the economic expansion may peak midyear. Carney’s comments suggest that BOC will remain on hold through midyear. CAD remains vulnerable to steady BOC policy outlook and concern that the Canadian economy may weaken midyear. CAD also remains vulnerable to concern about the impact of tightening of monetary policy in China.

Next week’s Canadian economic calendar includes the February 8th release of January housing starts expected at 164.3k compared to 174.5k last month. On February 10th December trade balance will be released expected at -0.121bln, compared to 0.3334bln last month. On February 11th December housing price index will be release expected unchanged at 0.4%.

The technical outlook for CAD is mixed as USD/CAD consolidates above 1.0600. Look for near-term support at 1.0532 the January 25th low with resistance at 1.0780 the February 5th high.

AUD

AUD traded lower pressured by weaker global equity market trade and concern about the global recovery. Recent tightening of lending conditions in China and worries about EU fiscal outlook dampens risk appetite and demand for high-yield growth led currencies like the AUD. In addition Thursday’s report of a sharp rise in New Zealand’s unemployment rate and weaker than expected Australian retail sales indicate that the global recovery may be at risk. Australia’s December retail sales dropped by 0.7%. The decline in retail sales may be an indication that the Australian domestic economy is slowing. New Zealand reported that its unemployment rate climbed to 7.3% last quarter from 6.5% previous three months. The rise in New Zealand’s unemployment will likely reduce the potential for near-term rate hikes in New Zealand and Australia. This week’s major development for AUD trade was the RBA’s unexpected decision to leave monetary policy unchanged. Consensus was the RBA would hike rates 25 bps to 4%. The RBA cited recent tightening in China and tame inflation is the primary rationale for maintaining current level of interest rates in Australia. The monetary policy statement for the RBA was released last night and it said that recent rate hikes have materially reduced monetary stimulus and will be adjusted if the economy improves. Therefore the RBA has not shut the door on future rate hikes. In the monetary policy statement the RBA upgraded its GDP and CPI forecast. The RBA also said that the Australian unemployment rate has peaked at 5.75%. Sentiment towards the AUD remains negative.

Next week’s Australian economic calendar includes the February 10th release of December housing finance expected 2% compared to -5.6% last month. On February 11th January unemployment and employment growth will be released. The unemployment rate is expected unchanged at 5.5% with employment growth at 25k compared to 35.2 last month.

The technical outlook for the AUD is negative as the AUD breaks trend line support. Expect AUD support at 8585 the September 28th low with resistance at 8928 the February 2nd high.

By Michael J. Malpede

Easy Forex

Michael J. Malpede is Chief Market Analyst with Easy-Forex® and has previously been featured on Bloomberg TV, Bloomberg radio, Reuters, MarketWatch, Wall Street Journal, Chicago Tribune, Chicago Sun Times, Toronto Star and Nikkei press. In analyzing the markets, he draws from 29 years of Foreign Exchange Research as a Foreign Exchange Analyst.

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