FOREX TRADING

The dollar rose on Friday for a third consecutive day, pressuring stocks and commodity prices for a third day. US nonfarm payrolls declined a modest 20K in January with the unemployment rate falling to 9.7%. The S&P 500 gained 3.08 to 1,066.19 and erased earlier large losses as US consumer credit declined less than forecast and support at 1050 held. The yen fell versus the dollar but rose against most other key currencies on carry trade unwinding. The euro declined amid ongoing concerns about the fiscal stability in the PIGS countries and concern that efforts by Greece, Portugal and Spain to reduce their deficits will hurt the fragile economic recovery. Sterling fell despite higher-than-expected producer-price inflation. The oversold Australian and Canadian dollars rose. The Canadian dollar was supported by an unexpected drop in Canada’s unemployment rate and stronger-than-expected employment growth. The Swiss National Bank reportedly intervened in the FX market to prevent the Swiss franc from further appreciation against the euro after the EUR/CHF fell to the lowest level since October 2008.

The dollar index rose for a third straight day and touched the highest level since July 9. The appreciating dollar is increasing deflationary pressures, depreciating risky assets and may end the US/global fragile economic recovery. The dollar index rose about 9% since the beginning of December. There are support in the 79-area and important resistance at the 81 area. We expect a consolidation between the support and resistance.

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Headline Unemployment Rate Creates dollar Shocker

We’re not quite sure what all the fuss is about this morning when it comes to splicing and dicing the non-farm payrolls report. A 10.2% headline national rate of unemployment – the first in 26 years grabbed attention upon the announcement and created an avalanche of currency selling in favor of the dollar by investors. And how wrong they were! The actual payroll decline of 190,000 might have been 15,000 more than analysts were primed for but it was only the second time since August 2008 that employers shed less than 200,000 jobs in a single month.

We really don’t think anything changed, in terms of likely consumption habits, on account of the fact that a double-digit rate unemployment rate has arrived. As traders realize the mistake they made by reaching for the sanctity of the dollar after the report, its fast losing any gains on the day and as we commence our report, the dollar is now lower at $1.4900 after rising to $1.4813 earlier in the day.

Let’s get this straight. October’s report revealed 15,000 more job losses than expected. So what? The revision to the September report saw a smaller change by 44,000 jobs as the earlier reported losses were contracted. On a net basis the number of jobs lost over these two months at the end of the summer was actually 29,000 less than was expected moments before the data. So any notion that the economy is having a second-round meltdown is well premature and investors fixated by the glaring headline 10.2% headline appear to be simply blinded by the light today. On the agenda next month it will be no surprise to see ongoing amelioration in the pace of job cuts and a downwards revision to today’s household survey number. That’ll do the trick of garnering a huge year end rally!

The pound regained its poise against the dollar and is now higher at $1.6593. Indeed the broad dollar index is now lower on the day as everything has turned around with one exception.

The Canadian employment report was admittedly ugly and it remains to be seen whether a loss to 93.61 U.S. cents can be undone today. We suspect that may be the case later in the day. The concern for the health of the Canadian economy came after employers shed 43,200 jobs rather than expanding positions by 10,000. Last month’s data shocked by adding workers and one could argue that on average, today’s report is a wash. But we won’t go that far and we have to once again raise the issue of whether currency strength is indeed constraining economic growth as the government and central bank suggests.

The situation in Australia, that other commodity rich nation, continues to improve. A quarterly update from the Reserve Bank overnight shows substantially stronger economic growth compared to the report in August. The RBA raised its 2009 prediction of GDP growth from 0.5% to 1.75% and boosted its 2010 reading from 2.25% to 3.25%. As one might expect the Aussie has improved to 91.76 U.S. cents today.

Now that the sticker-shock is fading the U.S. markets might be setting up for a pretty positive day. The S&P 500 index future took a 12-point dive after the employment report and is now up on the day. We continue to expect the dollar to suffer at the hands of being the worst of the bunch, while we should also note the fact that gold futures exceeded $1,100 per ounce in the aftermath of today’s data.

Andrew Wilkinson
Senior Market Analyst

Interactive Brokers

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USD Edges Up Ahead of Jobs

The dollar was higher by the afternoon Thursday session as traders took to the sidelines ahead of tomorrow’s key US labor report. The greenback rebounded from a near one-week low against the euro around 1.4917 to bounce toward the 1.48-figure.

The economic reports released this morning included weekly jobless claims, Q3 productivity and Q3 labor costs. The weekly jobless claims improved to 512k versus an upwardly revised 532k in the previous week. Meanwhile, Q3 productivity blew away consensus estimates for a decline to 6.4%, instead surging to 9.5% from 6.9% in the previous quarter – its highest level in the third quarter since 2003. The preliminary reading for labor costs in Q3 declined by more than expected, falling by 5.2% compared with a 6.1% drop in the previous quarter.

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Euro Zone’s Unemployment Rate Inline With Expectations

The European economy, after witnessing a catastrophic year in 2008 and bleak first quarter this year, started to mitigate with the release of second quarter’s GDP, which surprisingly showed a decline in contraction to 0.2% from 2.5% in the three months ending March.

Wise interventions by the ECB and European national banks; caused data to gradually begin improving, increasing hopes of the euro zone being on the right track, where recovery is expected in just a matter of time. The ECB lowered the borrowing cost to 1% and unveiled 60 billion euros plan to purchase covered bonds, in addition to lending banks at the current benchmark.

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Weekly Economic and Financial Commentary

U.S. Review

A Huge Week for Policy Announcements

• The U.N. General Assembly, G-20 and FOMC meeting overshadowed this week’s economic news. Stimulus efforts remain in place but some programs are approaching expiration and plans were announced for an orderly winding down of the Fed’s quantitative easing.
• This week’s key economic news included reports on new and existing home sales. New home sales rose 0.7 percent, whereas existing home sales fell 2.7 percent.
• Weekly first-time unemployment claims fell more than expected, dropping 21,000 to 530,000. (more…)

Euro Area Lacks Fundamentals, but We Are Waiting for Some Good News Later This Week

A new week had started, and our concerns remain the same of the surging unemployment rates and low consumer prices, undershooting the ECB comfort zone affected by the ongoing weaknesses in the sixteen nations from curbed spending and weak confidence levels. We are sure that the euro area finally emerged from the worst recession since the euros establishment, but the ongoing downturns taking place from various sectors would diffuse back some clouds in our skies.

With all the actions taking place and improvements we can only say that the European Central Bank is in the waiting status, abstaining from taking further actions such as reducing or manipulating the benchmark rate along with other instruments waiting to see the effect of the previously injected aids. Because After all the taken measures by the Central Bank, improvements started to float on the surface brightening our outlook further giving out hopes to the businesses teetering on the brink of destruction. (more…)

Unemployment Stabilizes In South Korea Amid Recovery In Economic Activities

The stimulus plans adopted by the South Korean government played a main role into the balanced economic performance that the country presents, which was reflected on the labor market as the unemployment rate remained unchanged during the month of August.

The unemployment rate in South Korea reached to 3.8% during the month of August, matching the previous reading seen in July. The improvement in companies performance determined them to refrain from reducing their work staff, especially after domestic consumption was supported by the stimulus plans. (more…)

The U.S. Unemployment Claims is the primary publication today that is set to determine the level of the USD when it is released at 12:30 GMT. The other main releases that are set to dominate forex trading, especially for currencies such as the Dollar and EUR is the publication of the Services PMI for Britain at 08:30 GMT, the EUR Minimum Bid Rate at 11:45 from the Euro-Zone, and the ISM Non-Manufacturing PMI from the U.S. at 14:00 GMT. What are you waiting for traders! Open your positions in the USD, EUR, GBP, and AUD now.

USD – USD Setback Caused by Market Uncertainty

The US Dollar dropped slightly yesterday as equity markets began to slow the pace of their recovery. Erasing part of Tuesday’s gains, the EUR/USD retraced itself back towards 1.4300 at the opening of US markets as stocks slowly recovered, and the EUR followed suit against the greenback. Similar behavior was experienced against the British Pound as well, with a price reaching towards 1.6300 as of yesterday’s late trading hours. (more…)

It appears as though the momentum has shifted away from the Dollar. Don’t say I didn’t warn you all. The problem is, and it was evident in my last few posts before I embarked on week’s respite, that all these officials, also known as politicians, are making big and bold statements that are not supported by fact.

Two weeks ago had I said to you that the unemployment situation in the US was bad and getting worse you might have laughed – after all the initial numbers two Thursday’s ago were great, less people were filing for unemployment. (more…)

The currency markets are probably to look past the releases of Swiss unemployment, German industrial production and trade figures, and UK PPI to focus on the upcoming US Non Farm Payrolls report due late into European hours. Australian news was mixed the overnight session as the RBA talked up rate hike up possibilities while the construction sector shrank the most since April.

Key Overnight Developments

• Australia’s Construction Sector Shrinks Most Since April
• RBA Hints at Rate Hikes But Traders Not Convinced

• Euro, Pound Little Changed in Overnight Trading (more…)

The US Dollar is set to go highly volatile today on the release of Advance GDP figures for the second quarter from the U.S. economy at 12:30 GMT. The forecasted results are -1.4%, significantly better than the first quarter results of -5.5%. The other matters that are expected to move the market today are the issue of the CPI Flash Estimate and the Unemployment Rate from the Euro-Zone. In order to earn some big profits today, open you positions in the USD, EUR, GBP, and JPY now, as Friday’s trading gets under way.

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The Euro may extend recent losses in European trading hours as Germany’s unemployment rate rises to 8.4% in July, the highest since November 2007, as the Euro Zone’s largest economy sheds 43,000 jobs. Euro Zone Economic Confidence is also on tap.

Key Overnight Developments

• Japan’s Industrial Production Grows Most Since 1953 in Q3
• Euro, British Pound Flat Ahead of the Opening Bell in Europe

Critical Levels

The Euro is effectively unchanged going into the European trading session having oscillated in a narrow 0.4% range around 1.4050 in overnight trading. Likewise, the British Pound fluctuated in a 0.4% band around 1.6380, yielding a flat result ahead of the opening bell in London.

Asia Session Highlights

Japanese Industrial Production grew at the weakest pace in three months in June, adding 2.4% from the previous month. In annual terms, the pace of decline moderated to -23.4%, the slowest rate of contraction since December of last year. On a quarterly basis, output gained 8.3% in the three months through June, the most since 1953. Much of the resurgence can be chalked up to companies replenishing inventories having sharply cut back on orders and production as the global economic crisis reached a boiling point in 2008. More of the same is likely in the coming months as restocking continues. In fact, minutes from the last meeting of the Bank of Japan revealed policymakers expect manufacturing and exports will continue to recover “mainly due to progress in adjustments in [inventories]”. That said, any sustainable rebound will have to come with growth in underlying demand, which is arguably destined to remain sluggish for some time. Indeed, the International Monetary Fund (IMF) said its latest world economic outlook that global trade volumes are likely to rebound just 1% having shed a whopping -12.2% in 2009.

Euro Session: What to Expect

Germany’s Unemployment Rate is set to rise to 8.4% in July, the highest since November 2007, as the Euro Zone’s largest economy sheds 43,000 jobs. Mounting layoffs will hinder Germany’s ability to mount a robust recovery from the current downturn, weighing on disposable incomes and discouraging consumption, the largest component of overall economic growth. Indeed, the IMF recently forecast that Germany as well as the Euro area as a whole will stand apart from other industrialized economies in seeing GDP continue to shrink in 2010. Further, the ailing labor market is likely to become a more visible drag on risk appetite as the government’s fiscal package is used up and firms run out of room to cut capacity and produce upside earnings surprises, yielding to sluggish revenue growth and driving stock valuations lower. This bodes ill for the Euro, particularly against the US Dollar, with interest rates likely to remain low and risky assets on the defensive.

Separately, Euro Zone Economic Confidence is expected to rise to 75.0 in July, marking the fourth consecutive month of improvement since the metric hit a record low in March. The reading is a composite of five sub-sector sentiment reports: Industrial Confidence (40%), Service Confidence (30%), Consumer Confidence (20%), Construction Confidence (5%), and the Retail Trade Confidence Indicator (5%). The metric may continue to gain for a bit longer as the combined impact of fiscal stimulus measures across the region and higher stock prices boost confidence, but seems likely to reverse course in the medium term as lackluster domestic and overseas demand creep back into the forefront.

Written by Ilya Spivak, Currency Analyst
Article Source – Euro May Extend Losses as German Jobless Rate Hits Highest in Nearly 2 Years (Euro Open)