U.S. Dollar: 10.2% Unemployment - The Number Says It All

Last updated 11/6/2009 6:01 PM EST (GMT -5) 2 Comments

Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: 10.2% UNEMPLOYMENT - THE NUMBER SAYS IT ALL
• EUR/USD: SUCCUMBS TO MILD LOSSES
• GBP/USD: SHOWS RESILIENCE IN THE FACE OF THE NFP
• USD/CAD: EMPLOYMENT WILL KEEP BoC MOTIONLESS
• AUD/USD: RBA UPGRADE CHANGES RATE HIKE SCENARIO
• NZD/USD: OIL DROPS 2.79%
• USD/JPY: INDICES CONTINUE TO FOSTER OPTIMISTIC SIGNS

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: 10.2% UNEMPLOYMENT - THE NUMBER SAYS IT ALL

As disappointing as the NFP may have been, most markets took the number in stride. The dollar showed mostly mixed weakness on the day, while strengthening against the euro and the Canadian dollar. The aussie was the biggest victor of the day rising against the dollar by 0.84%, a signal that largely confirms that the risk trade remains fairly intact. On the other hand, the loonie took the largest fall on disappointing employment numbers. Stock markets swayed in and out of positive territory on disagreements over whether today’s events warranted a rally. The bulls won out, and pushed the Dow further above the 10,000 mark.

Employment Sparks Economic Fears

The strong rise in third quarter growth seen a few weeks ago seems inconsequential in the face of unemployment which has reached a quarter-century high. All in all, the Non-Farm Payrolls crushed much of the collective optimism that surfaced as a result of growth for the US economy. The monthly report remains a force that compels markets to take grips with reality. As unemployment circumvented the 10% boundary, non-farm payrolls slipped by a worse-than-expected 190k, with job losses spread evenly across the gamut of US industry. The number of people that have become unemployed has officially reached 7.3 million since the start of the recession. The NFP report showed that the average work week remained at a record low of 33 hours, suggesting that a lot more capacity can be refilled before businesses even contemplate renewed hiring. As evidenced by the recent surge in productivity, companies will be squeezing out every possible unit of production from the employees that have remained on board instead of bring on new ones. The weakness in employment has many implications for our economic health going forward. Obviously with less people earning income, consumer spending is likely to stay on its downward track, a trend that will be particularly problematic going into the holiday season. The result could only be weakness in retail sales and declining prospects for fourth quarter growth. However, it was the continued easing in the magnitude of the losses in NFP that have kept most markets afloat. It is the one positive outcome that can be drawn from the wreckage, but one in which that cannot nearly offset the effects of more job losses. Nevertheless, markets try to remain optimistic and hold on to the view that the trough in jobs has already passed as we can therefore expect a small but steady improvement on a month by month basis. Another report from today confirmed the consumers’ woes, as Consumer Credit fell for the eighth consecutive month.

What’s to come?

We have just been through a big week of employment reports and central bank decisions, so rightfully next week provides a break in which markets can grapple with the events of the past week. There are only a very few things that are worth noting for next week’s US event risks. The first of which is a minor report on IBD/TIPP Economic Optimism on Tuesday which will be followed by the governmental Monthly Budget Statement on Thursday. Friday will see the most important releases in the form of the Trade Balance and University of Michigan Consumer Confidence.

EUR/USD: SUCCUMBS TO MILD LOSSES

The euro faced some slight selling pressure in today’s trading, but has therefore proved its resilience considering the magnitude of the latest U.S. Non-Farm Payrolls report. Not much in terms of data was received from the region, except for German Factory Order which rose to 0.9% from last month’s 1.4%. Orders have officially strengthened for the last seven consecutive months. However, the numbers really prove their strength when considering that export orders made a strong advance, rising by 3.7%. This might suggest that global demand has been revived just enough to offset any negative effects of the strong euro. This is a good sign for the ECB who will have considerably more flexibility if evidence continues to mount that suggests the euro has not posed a significantly negative threat. In any event, European data from next week is sure to be more market moving. On Monday, we can expect the German Trade Balance, which could impress considering the jump in export orders, and Sentix Investor Confidence. On Tuesday, the German CPI and ZEW Economic Sentiment are set for release. Things really start to get busy on Friday with the release of both the Euro-zone and German preliminary reports on Gross Domestic Product. There is a lot hanging on these indicators, as everyone expects that the third quarter proved to be decisively more improved than the second. In any event, considering how the euro largely shrugged off today’s NFP, we could expect a more substantial rally to ensue off of next week’s data if an even marginal improvement is shown.

GBP/USD: SHOWS RESILIENCE IN THE FACE OF THE NFP

The pound maintains its positive momentum, rising for the fourth straight day. EUR/GBP also reiterates sterling strength, and is starting to descend toward a two-month low. The path in the currency pair is a bit ironic considering the fact that the ECB and BoE have charted out a different course in monetary policy issues. Despite the fact that the BoE expanded quantitative easing by less than the £50 billion expected amount, it does not hide the fact that the ECB is much closer to unwinding such unconventional techniques. Nevertheless, British economic data may have given the pound an extra jolt. Producer Price Inputs rose to a 16-month high at 2.6%, while annual input prices increased for the first time in nine months. However, the weakness in the output measures does obscure the good news that this report producer. Producer Price Outputs increased only by 0.2%, less than the 0.5% increase from the prior month. The middle of next week is set to produce some very important indicators for British strength. The first of which is the Trade Balance, expected for release on Tuesday. On Wednesday, we receive both the Jobless Claims change and the BoE’s Quarterly inflation report. Since many are pointing to the rising unemployment rate as one of the supreme weak spots in the UK economy, the employment report on Wednesday will obviously garner added weight. The Inflation report should provide added evidence as to the BoE’s reasoning for expanding QE by only £25 billion and if we could expect an additional rise in future meetings.

USD/CAD: EMPLOYMENT WILL KEEP BoC MOTIONLESS

The aussie and kiwi are posting minor gains as the NFP was unable to sink the recovery trade. The surge in gold to another record high definitely did not hurt the rallies either. The Canadian dollar, on the other hand, is a completely different story and is suffering from the traumas of weak employment. Canadian unemployment rose unexpectedly to 8.6% from 8.4% reported last month, when unemployment posted a surprising fall. To top things off, the net change in employment posted a disturbing decline of 43.2K, compared to the gain of 10,000 that was expected. The industries that weighed on the report the most were services related, indicating that a reduction in consumer spending has already taken effect. Most of all, the report adds to the list of reasons for the Bank of Canada to sit on their hands and resist the temptation to bring rates higher. Their estimates of a mid-2010 hike are actually starting to look optimistic as the severe glut in employment is sure to weigh on both prices and growth. Next week has Housing Starts in store for Monday. The RBA’s Quarterly Monetary Report was one of the big surprises of the day, and indicates a long string of rate hikes may be on its way. Even though some disappointing data suggested otherwise, the bank expects “a further gradual lessening of monetary stimulus.” Thanks to the resilience of the economy, the central bank predicts that Australia will grow by 3.25% over the course of 2010, which far outweighs previous estimates. Furthermore, they expect continued growth in exports which will be incurred probably as a result of Chinese purchases, a factor that should outweigh currency concerns. Australia’s unemployment report will be the big event for next Thursday, and could conceivably cement expectations for a quarter-point hike in December. New Zealand will be producing Retail Sales for Wednesday.

USD/JPY: INDICES CONTINUE TO FOSTER OPTIMISTIC SIGNS

The Japanese Yen appreciated against all major counterparts as investors scaled back on risk appetite after worst than expected job report from the U.S. USD/JPY once again penetrated the ever important psychological resistance of 90.00. Nonetheless, the trend of risk appetite seems to inhabit the atmosphere. Japan’s 10-year government bond finished a five-week decline, suggesting that investors are looking into higher yielding assets as global recovery persists. Needless to say, world’s second largest economy is slowly picking up steam in its own recovery. Coincident Index rose for the seventh consecutive time in September prompting government officials to upgrade assessment of the index. Japanese Cabinet Office declared that the trends are currently pointing that the “economy is in a stage of uptrend." Meanwhile, Leading Indicators matched the steepest rise of June appreciating by 3.2% to 86.4 in August. Overall better than anticipated economic condition indexes continue to foster optimistic signs of export based recovery prompted by continuing demand from China and other developing nations. Positive economic releases in the following week will bolster the notion of a swift turnaround in the economy. Early in the week, Current Account and Trade Balance expect to print much higher figure than in the previous months. Furthermore, Domestic CGPI, Eco Watchers Survey, and Consumer Confidence will be released.

EUR/USD: Currency in Play for Next 24 Hours

EUR/USD will be the currency in play for the upcoming Monday. Germany’s Trade balance will start an eventful week at 7:00GMT or 2:00AM EST. Shortly after Sentix Investors’ Confidence will be released at 9:30GMT or 4:30AM EST, followed by German Industrial Production at 11:00GMT or 6:00AM EST.

After a remarkable run-up, EUR/USD stalled in its progression lingering within Range Trading Zone established through the Bollinger Bands. The uptrend seems to be temporarily on the backburner for the time being. Nonetheless, the pair may resume advancing if it manages to break through resistance represented by 1 ^st Standard Deviation at 1.4960. Conversely, if the pair breaks through 50-day SMA at 1.4700 which signifies current support, anticipate confirmation of a reversal in intermediate trend.

Comments (2)

Lang

November 08, 2009 at 03:48 PM ET

Hey Kathy, I notice a big change in the forecast for rate cut to 0% in December FED meeting. Is that a result of the 10.2% unemployment rate? Would that be a big thing for the market to digest?

Yaakub

November 08, 2009 at 10:08 PM ET

Hi Madam Kathy,

What is your trading range in GBP/USD in this week?
Do you suggest the USD key rate had enough is enough?

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.