FOREX TRADING

Today’s main data release is the US non-farm payrolls report for May. Encouragingly, the Federal Reserve has sounded significantly more upbeat about US labour market prospects in its recent communications on policy. The minutes of the 27-28 April FOMC meeting, for example, noted that ‘…employment had increased in recent months’ and numerous members ‘expected a further firming of labour markets conditions going forward’. We also note that the Fed did not have access to news of April’s 290k gain in employment at this particular FOMC meeting. Nonetheless, the bigger picture is still quite fragile, with no room for complacency. The unemployment rate is still high in an historical context, while the issue of long-term unemployment and an associated erosion of skills poses a clear threat to durable economic recovery. We look for non-farm payrolls to rise by 500k in May, after a 290k rise in April. However, private payrolls are forecast to moderate to 175k (down from 231k), with the majority of new hires expected to be for the upcoming US census. Consequently, we expect payrolls to slow sharply in the coming months.

Elsewhere, Canada will also report latest employment data for May while in the euro-zone, the second estimate of Q1 GDP is scheduled for release. We look for an unrevised +0.2% quarter-on-quarter outturn.

Chart: The US labour market is improving, although the jobless rate remains high by historical standards…

USD Higher, Q4 GDP Expanded By 5.7%, Best In Six Years

• USD: Higher, US Q4 GDP confirms faster growth, bond yields rise, consumer sentiment beats expectations
• JPY: Lower, Japan’s deflation accelerates, pressure on BOJ to ease, threat of intervention
• EUR: Lower, concern Greek fiscal troubles may spread, EU unemployment and CPI rise
• GBP: Lower, S&P says UK banking system less stable, UK house prices rise
• CAD and AUD: AUD lower & CAD mixed, India hikes its reserve ratio 75 bps

Overview

USD traded mixed ahead of today’s release of Q4 GDP. JPY was pressured by report of accelerating deflation in Japan and comments from the BOJ governor which suggests that the BOJ is ready to act against potential market turmoil. European currencies were mixed initially pressured by fresh concern about sovereign debt risk in non-core European countries with the GBP pressured by an S&P report which says UK banks are less stable. EUR downside was limited by report that the EU may be preparing a bailout for Greece. GDP downside was limited by report of rising UK house price. CHF rallied in reaction to report of better than expected KOF leading indicators. Commodity currencies traded higher rebounding from initial pressure sparked by weaker Asian equity market trade with support from statement from Chinese officials that they will keep monetary policy loose despite rising price pressures and better than expected GDP reports in the US and Canada. AUD gains were limited by speculation the RBA may be nearing a pause in its tightening cycle.

US economic data was positive with advanced Q4 GDP confirming faster US growth at the end of 2009 and Chicago PMI rising more than expected. Despite the acceleration of growth in the fourth quarter economists are concerned that the economic rebound may not be sustainable as fiscal and monetary stimulus is withdrawn and recent economic data shows the recovery in housing and retail demand slowing. Much of the improvement in Q4 GDP was due to increased auto production and rebuilding of inventories. Consumer spending and business investments remain weak. USD traded higher after release of stronger than expected GDP. The GDP report may have some analysts looking for an earlier FOMC rate hike. The GDP deflator however came out below expectations which suggest that inflationary pressures remain tame despite improving growth. Focus turns to central bank policy meetings in Australia Tuesday and Europe Thursday and Fridays US January unemployment report. The RBA is expected to hike rates 25 bps to 4%, the ECB is expected to remain on hold and continue to outline exit strategies and the BOE is expected to remain on hold as well with the possibility of announcing a pause in its asset purchase program. USD headline unemployment is expected to post a 0.1% rise to 10.1% and nonfarm payrolls may turn slightly positive. (more…)

USD Lower as Fed Seen on Hold for Quite Some Time

• USD: Lower, diminished Fed rate hike speculation, optimism about the global recovery
• JPY: Higher, gains limited by selling in cross trade, EUR/JPY tops 134.00
• EUR: Higher, improving risk appetite, shrugs off of possible downgrade of Portugal’s debt rating
• CHF: Higher, strong Swiss retail sales, gains limited by threat of SNB intervention
• GBP: Higher, business optimism improves, Tories pledge to cut UK budget deficit more than Labor
• CAD and AUD: AUD & CAD higher, China’s exports surge, strong Australian jobs & Canadian housing data

Overview

The USD traded lower to start the week pressured by fallout from Friday’s report of an unexpected decline in US nonfarm payrolls and in reaction to improving optimism about the global recovery as China’s exports surge. The decline in nonfarm payrolls will force the Fed to maintain low yields. The Fed’s Bullard said Monday that US interest rates are likely to stay low for quite some time. The surge in China’s exports sparked a rally in Asian equities to a 17 month high and contributed to improving risk appetite. CHF was supported by report of strong Swiss retail sales with gains limited by threat of SNB intervention. EUR traded higher despite report Portugal’s debt rating may be downgraded. GBP benefits from the Tories pledge to cut the UK budget deficit more than the Labor Party. Commodity currencies surge in reaction to stronger metals and crude prices with gold trading $20 higher and crude prices topping $84 a barrel. AUD was also supported by strong ANZ jobs report and the CAD by strong Canadian housing starts. CAD gains were limited by selling in cross trade to Australia and Europe. Strong economic data from China and Australia fuels speculation that interest rates may be heading higher in Asia. No major US economic data was released in today’s trade. Focus turns to the start of the US earnings season and the release of US retail sales and Thursday’s ECB policy meeting. USD is vulnerable to long liquidation pressures as investors pare back speculation that the Fed will bring forward interest-rate hikes.

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