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The EUR/USD was lower by more than 100 points at the start of the week’s trade today, as fear of a spreading swine flu epidemic gripped global capital markets. Centered in Mexico, the swine flu outbreak has managed to kill more than 80 people, but the latest cases in US and Canada have not resulted in any further fatalities so far. Human to human infection of swine flu is spread through touch and sneezing and is treatable with antibiotics. Investors in Asia, still haunted by memories of SARS outbreak in 2003 were quick to react, selling high beta currencies while seeking refuge in the dollar and the yen.
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UK jobless claims rose by 73.7K versus estimates of 118K, printing at nearly half the level of the month’s prior reading of 138.4K while the unemployment rate matched expectations reaching 6.7% - its highest level since 1997.
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The EUR/USD broke the key psychological barrier of 1.3000 in early Asian trade this morning after comments over the week-end by ECB chief Jean Claude Trichet suggested that the central bank may lower rates by another 25bp to 1.00 percent while ECB Executive Board member Lorenzo Bini Smaghi said the bank’s benchmark 1.25 percent interest rate is “very close” to its floor. The ECB council continues to be divided over the proper monetary policy path given the economic weakness in the region and this disagreement amongst policymakers has created tremendous uncertainty for the currency as traders deciding to sell first and ask questions later.
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The big story in the financial markets today was not the improvements in economic data, but the improvement in earnings. The health of the financial sector is critical to the recovery in the U.S. economy and therefore investors are keeping a particularly close eye on the reports from the banking sector. In order for the global economy to have any chance of recovering, banks need to stabilize and start turning a profit so they will feel comfortable enough to lend. Therefore the better than expected results from Wells Fargo has been received positively by the equity and currency markets. The U.S. dollar sold off against the commodity currencies and rallied against the Japanese Yen. The dollar also gained strength against the euro and British pound, which is not in line with the improvement in risk appetite because of euro and pound specific reasons that we will discuss further in the respective sections.
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The Reserve Bank of Australia made a Solomonic decision tonight lowering rates by 25bp to 3.00%. The RBA split the difference between Aussie bulls who anticipated no change whatsoever in the overnight rate and Aussie bears who forecast a larger 50bp cut. In commenting on their decision the board noted that , “There has already been a major change in both monetary and fiscal policy in Australia. Market and mortgage rates are at very low levels by historical standards and business loan rates are below recent averages, reducing debt-servicing burdens considerably. Nonetheless, the Board judged that there was scope for a further modest adjustment to the cash rate."
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European equity markets were broadly higher in early morning trade fueling risk appetite in currencies as all the majors with the exception of the yen rebounded against the buck after yesterday massive sell off. The Asian and early European trade was characterized by strong carry flows with yen crosses helping to lift the euro the Aussie and the pound.
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German unemployment reached a new high printing at worse than expected increase of 69K versus forecast of 53K and the month’s prior reading of 40K. The news suggests that the collapse of global demand which has seen industrial Orders decline as much as 30% on a year over year basis is finally having a negative impact on the labor market.
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The pound lost more than 200 points by early London trade after the currency came under assault on multiple fronts as the economic fundamentals of the UK economy deteriorated further, UK jobless rolls swelled by 138.4K versus expectations of 84.5K as the overall unemployment number crossed the critical 2 Million mark. The claimant count rate increased by 4.3% versus 4.0% forecast while average earnings including bonus dropped from 3.2% the month prior to 1.8% in January. Additionally the unit was hurt by an earlier report from IMF that suggested UK recession could last well into 2010.
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UK jobless rolls swelled by 138.4K versus expectations of 84.5K as the overall unemployment number crossed the critical 2 Million mark. The claimant count rate increased by 4.3% versus 4.0% forecast while average earnings including bonus dropped from 3.2% the month prior to 1.8% in January.
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This past week has been marked by recoveries in both the currency and equity markets thanks to better than expected U.S. economic data and reports of profitability from banks. Although the price action that we have seen thus far is still in line with a bear market rally, the move higher has been a breath of fresh air for many investors. For the time being, the downtrend in the EUR/USD has been broken. Even though the currency pair continued to edge higher, it remains to be seen whether the strength can continue. There are a lot of economic data due for release next week, but not before this weekend 3 big event risks – the G20 Meeting, OPEC Meeting and Bernanke’s first ever on-the-record television interview as Fed Chairman.
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Canadian labor markets deteriorated further in the month of February as 82.6K job disappeared against expectations of only 46K loss. The unemployment rate climbed a whopping 50 basis points to 7.7% from 7.2% just a month earlier. Full time employment fell by 110.9K jobs while part time employment rose 28.3K. This was the fourth consecutive month of job losses for the Canadian economy.
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Australian unemployment hit a four year high reaching 5.2% versus estimates of 5% but surprisingly the country’s economy continued to generate jobs adding 1800 new workers versus forecasts of -20,000 loss. The labor participation rate also improved rising to 65.5% from 65.3%.
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As we have promised, trading currencies have become more interesting following the interest rate decisions in Europe. The next 24 hours should prove to be just as exciting for forex traders with the February non-farm payrolls report due for release. The US dollar has rallied significantly ahead of the payrolls report, which is traditionally the single most market moving economic data for the EUR/USD. The cohesive rally in the US dollar and the price of gold along with the sell-off in US equities indicate that risk aversion is the main theme of the day. This also provides a clue on how the dollar could trade following Friday’s non-farm payrolls report (February Non-Farm Payrolls Preview).
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There is no question that the US labor market is very weak with job losses expected to extend for the 14th consecutive month. If February non-farm payrolls exceed -450k, then more than 4 million Americans would have lost their jobs since January 2008. The current forecasts for non-farm payrolls are far more pessimistic with analysts predicting a decline of 650k jobs. The US dollar has rallied as risk aversion drags down the higher yielding currency pairs, but if non-farm payrolls surprise to the upside and we that think it will, the dollar may give back some its spectacular gains.
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Eurozone unemployment for January increased by 256,000 claims taking the overall rate to 8.2% from 8.1% the month prior as the global recession continues to impact the 16 member economic union. While job losses in the region are still only half as large on a monthly basis as those in the US, the EZ has already lost 1.5 million jobs over the past four months and the trend is likely to accelerate as 2009 progresses.
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The US dollar strengthened briefly following this morning's inflation and employment reports. Headline producer prices rose for the first time since August while core prices increased 0.4 percent.
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UK unemployment data proved more positive than expected printing at 73.8K versus forecasts of 88.5K new jobless claims. Average earnings also recorded an upside surprise coming in at 3.2% versus 3.0% expected.
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This morning, the Bureau of Labor Statistics reported that January was another month of massive job losses. For the third time in a row, more than 500k Americans lost their jobs. The market was looking for payrolls to drop by 540k, but instead they fell by a whopping 598k (Instant Insight on January Non-Farm Payrolls). Yet, currencies and equities traded like non-farm payrolls increased rather than decreased but this baffling response to a very negative number can be easily explained by the prospect of help from Washington.
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On Friday, the Bureau of Labor Statistics is expected to tell us that US employers fired another 500k people in the month of January. Surprisingly enough currencies and equities are trading higher ahead of the non-farm payrolls report which suggests that traders are not afraid of a bad number. Everyone knows that the US economy is very weak and major job losses will continue. Since traders are becoming immune to bad data, it may take job losses in the area of 600k to spook them (January Non-Farm Payrolls Preview). Instead, traders are looking beyond Friday’s non-farm payrolls report to the Monday, February 9th speech by US Treasury Secretary Timothy Geithner. According to a Treasury official, Geithner is expected to unveil a bank rescue plan next week. This is one of the few things that could strike a meaningful recovery in the currency and equity markets. If traders deem Geithner’s plan as satisfactory, we could see a further recovery in the financial markets despite the fact that the US economy will get worse before it gets better.
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German unemployment rose to a much greater than forecast 56K job loss versus projections of 32K loss and the month prior results of only 18K loss. This was the second consecutive month of increase in unemployment rolls suggesting that the economic contraction in Eurozone’s largest economy is beginning to have a direct impact on the labor market. The rapid pace of deterioration in labor demand bodes badly for future economic growth in the region as consumer demand is sure to suffer further.
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We were one of the few analysts calling for a potential rebound in non-farm payrolls in the month of December (Non-Farm Payrolls Preview: Could We See a Rebound) and that was exactly what we saw this morning. 524k jobs were lost in the US economy, which is modestly better than the -586k revised loss for November.
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Canadian unemployment increased by -34K jobs versus forecast of losses of -21K as the unemployment rate inched by another 30 basis points to 6.6% from 6.3% the month prior.
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The anti-dollar rally continued in Asian and early European trade today in the aftermath of yesterdays surprising -75bp cut by the Federal Reserve, but the pace of gains was decidedly more muted as currency traders booked profits in the wake of lackluster equity market performance and downcast economic data from UK.