Dollar Gains Ground as China Dismisses Reserve Speculation

Last updated 7/2/2009 5:54 AM EST (GMT -5) 3 Comments

Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• China denies questionning dollars reserve status
• EZ unemployment at 10 year high
• UK Construction PMI worse than expected for first time in 4 months
• Equities lower ahead of NFP
• Oil sinks to $68/bbl
• Gold to $937/oz.

Overnight Eco

• JPY Monetary Base 6.4% vs. 8.1%
• AUD Trade Balance worse at -56B vs. -0.10B
• NZD ANZ Commodity Prices 0.2% vs. 2.8% last
• GBP Construction PMI 44.5 vs. 45.1
• EUR PPI -0.2% vs. 0.1% eyed
• EUR Unemployment Rate 9.5% vs. 9.3% forecast
• EUR ECB Rate Decision n/a

Event Risk on Tap

• USD Non-Farm Employment Change expected at -375K
• USD Unemployment Rate expected at 9.6%
• USD Average Hourly Earnings expected at 0.2%
• USD Unemployment Claims expected at 612K

Price Action

• USD/JPY steady above 9650 in quiet trade
• AUD/USD pressured lower towrads 8000 on weak Trade data and risk aversion
• GBP/USD dropd below 16350 on weak construction PMI and general move away from risk
• EUR/USD below 1.4100 as EZ unemployment rises to 10 year high

Dollar gained ground in pre-NFP trade boosted by comments from China's Vice Foreign Minister stating that the USD is the main global reserve currency in the world and by weaker than expected economic data out of the EZ and UK. The euro sank to 1.4100 in early European trade unwinding half of yesterday’s gains and pound tumbled to 1.6350 after weaker than expected construction PMI data and a general move away from risk pressured the unit to the downside for most of the night.

China Vice Foreign Minister He noted that he hasn’t heard of any Chinese request for reserve currency debate at the next G8 meeting, adding that the USD is the global reserve currency and that he hopes it remains stable. The statement squashed the speculation started yesterday that Chinese will push for a new reserve currency debate at the upcoming meeting, pushing the euro lower to 1.4080. As we noted recently the Chinese have no interest in destabilizing the currency markets any further especially given the fact that US is a key customer for Chinese goods at time when global recovery remains fragile at best.

The fragility of the recovery theme was evident in today’s eco data which saw EZ unemployment skyrocket to a 10 year high, while UK PMI construction contracted in May. EZ unemployment rose to 9.5% from 9.3% projected as conditions in southern Europe deteriorated further. As we’ve stated before the risk of EZ unemployment rolls rising into the second half of 2009 remains quite high especially if German efforts at “short work week” arrangements begin to fail. Many analysts now expect the EZ rate to climb into double digits mirroring the labor conditions in US.

In UK meanwhile construction PMI printed at 44.5 vs. 45.1 contracting for the first time in 4 months. This is the first chink in the armor of the UK recovery story clearly showing that the pace of improvement is slowing markedly and may in fact begin deteriorating once again. We wrote earlier this week that PMI data could prove crucial to future direction of the pound, making tomorrow’s PMI services report a key data point for the market.

Finally the North American session of this holiday shortened week could prove to be particularly busy and volatile with both the ECB rate announcement and the NFPs on the docket. In our Special Report we discussed how the NFP data has consistently underestimated the scope of the unemployment problem and our best guess is that the NFP estimates will miss to the downside given the 600K+ readings in weekly jobless claims. However, even if the number prints better than expected, traders should be skeptical of the data given the consistent downward revisions by the BLS this year.

FX Upcoming

Comments (3)

John Booke

July 02, 2009 at 07:22 AM ET

Boris
How will huge spike in Social Security retirees this year effect the Unemployment rate? From January to the end of May over 750,000 new retirees have been created. Won't most of these people be taken out of the unemployment survey? Will the big leading edge of "baby boomers" keep unemployment rate below 10%?

bschlossberg

July 02, 2009 at 07:32 AM ET

That's an interesting question and one I frankly haven't thought of - but I believe that BLS defines the unemployment rate amongst working age adults so that makes the SS issue moot

Sultan

July 03, 2009 at 07:06 AM ET

Do you think China is playing both sides - on the one hand encouraging others to think of a new reserve currency for the longer term and then posting a denial to protect its reserves in USD for the shorter term?

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.