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U.S. Dollar: Are Payrolls A Game Changer?

Last updated 12/4/2009 5:14 PM ET (GMT -5) 14 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: ARE PAYROLLS A GAME CHANGER?
• EUR/USD: UPTREND BROKEN
• GBP/USD: TOUGH DECISION AHEAD
• USD/CAD HIT BY MIXED ECONOMIC REPORTS
• AUD/USD: GOLD DROPS $50
• NZD/USD: RBNZ EXPECTED TO REMAIN DOVISH NEXT WEEK
• USD/JPY: TAKING A SIGH OF RELIEF

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: ARE PAYROLLS A GAME CHANGER?

The unambiguously positive non-farm payrolls report triggered a massive rally in the U.S. dollar.  As a result, many of the major currency pairs saw their biggest moves in months.  The EUR/USD for example fell through the 1.50 level and traded as low as 1.4822, erasing the past month’s gains.  USD/JPY surged more than 200 pips and broke 90 in the process.  Considering that USD/JPY was trading below 85 last week, the more than 5 handle rally shows how far the dollar has come.  Non-farm payrolls is one if not the most important piece of data for the U.S. economy and therefore the possibility of returning to positive job growth next month could be a game changer for the currency market. At bare minimum, a move like the one we have seen today should have continuation, particularly since it is supported by fundamentals. 

Up until now, everyone had written off a near term recovery in the labor market.  Even Federal Reserve officials said the unemployment rate could remain at very high levels over the next year leading everyone to believe that the U.S. would be in another jobless recovery.  However the decline in the unemployment rate, the exceptionally small drop in non-farm payrolls, the 159k upward revision to the September and October data along with the sharp rise in temporary hiring and lengthened workweek are all reasons why traders have responded so positively to the latest non-farm payrolls report.  Of course, we are skeptical about the validity of the NFP number but this is what has been reported by the Bureau of Labor Statistics and what the entire market will be keying off of.  Therefore we have to respect the strength of the number and the market’s reaction.  We have previously said that there are only 2 things that could trigger a turn in the dollar – one being extremely positive U.S. economic data that would alter the market and the Fed’s expectations for tightening and the second being a big economic shocker that would send investors rushing into U.S. dollars.  Interestingly enough, a dollar rally was triggered by both of these factors this week – first we saw flight to safety into U.S. dollars because of Dubai and now the demand for dollars is being fueled by the strong non-farm payrolls report.  Unsurprisingly, rate hike expectations have increased significantly but they still remain at low levels.  The probability of a rate rise in March rose to 17 percent from 8 percent and a probability of a rise in June increased from 26 to 36 percent.

Are Payrolls a Game Changer?

Non-farm payrolls are only a game changer for the dollar if the unemployment rate continues to fall and job growth returns. Although we won’t know if this happened until next month, investors will most likely behave as if the U.S. economy has really turned a corner as long as next Friday’s retail sales report does not disappoint.  Given that the ICSC chain store sales report declined and the Redbook retail sales report increased, the degree of consumer spending last month is unclear.  Aside from retail sales, the trade balance and the University of Michigan consumer confidence reports are the most important economic releases on the calendar.  Meanwhile it is also important to recognize that part of the reason why the dollar did not give back any of its gains is because equities ended the day virtually unchanged.  When the stock market opened, it rallied significantly but then reversed as the dollar strengthened.  Since the relationship between equities and currencies can go both ways, if equities rise significantly in the coming week, the dollar could give back its gains.  

EUR/USD: UPTREND BROKEN

The uptrend in the EUR/USD has been broken by the surprisingly strong U.S. non-farm payrolls report.  Since there was no Eurozone economic data on the calendar to help the euro and given that the currency pair was unchanged prior to release, it is clear that the drop in the euro is entirely due to the market’s demand for dollars.  This is further supported by the hawkish comments from ECB officials this morning that should have been positive for the euro.  Liikanen said the euro economy has bottomed out and all extra liquidity operations are no longer needed.  Bini Smaghi echoed this sentiment although he was slightly more cautious - he said that consumption remains weak and unemployment will continue to rise.  He also pointed out that the ECB should be more worried about exiting too late than too early, but they haven’t decided to exit from low interest rates.  Next week, German factory orders, industrial production and trade balance are due for release and could help the euro if they reflect the same strength as the latest manufacturing PM numbers.  The Swiss franc will also be in play with a Swiss National Bank monetary policy meeting on the calendar.  If EUR/CHF or USD/CHF were trading at Thursday’s levels, we would expect critical comments from the SNB about the strength of their currency.  However the Swiss Franc has sold off aggressively over the past 24 hours and if the losses are sustained, the SNB may be more relaxed.

GBP/USD: TOUGH DECISION AHEAD

Of all the major currencies, the British pound dropped the least against the U.S. dollar.  The calendar was devoid of any economic data today, so the downfall in sterling is purely as a result of dollar strength, not any changes in U.K. fundamentals. However, next week is shaping up to be a big week in terms of economic releases. Industrial and Manufacturing Production will be released on Tuesday, while the Trade Balance is on the way for Wednesday. However, everyone is really holding their breath for the Bank of England’s interest rate decision on Thursday. The BoE left things up in the air to a large extent after deciding to expand asset purchases by £25 billion. However, BoE Governor Mervyn King has been quoted as saying that he has an “open mind” for expanding the program further. Even though the bank typically waits until their inflation report released every quarter to make any profound decisions, King’s comments may indicate a more sudden course of action. Nevertheless, economic data has not really justified the urgency to keep expanding quantitative easing. For one, the biggest influence to the bank should be the fact that Consumer Prices were higher across the board in November. The sheer uncertainty surrounding the decision makes it one of the most highly anticipated events next week.

USD/CAD HIT BY MIXED ECONOMIC REPORTS

It was a big day for Canada but the conflicting signal from economic reports led to erratic price action in the loonie.  The Canadian dollar initially responded very well to the exceptionally strong employment numbers.  Last month, 79k people found new jobs, driving the unemployment rate down to 8.5 percent from 8.6 percent.  Not only was this number 5 times stronger than the market’s forecast but if it was normalized for the U.S. population, it would be equivalent to 791k jobs.  Given the recent pickup in the Canadian auto industry, much of the job growth was probably concentrated in this sector.   Yet the extremely impressive labor market numbers is at odds with the second consecutive month of slower growth in the manufacturing sector.  The IVEY PMI report fell from 61.2 to 55.9, the lowest level since August.  Therefore it remains to be seen whether job growth can be sustained. Either way, the Bank of Canada has a monetary policy decision next week and the overall strength of the latest economic reports should turn the BoC more hawkish.  The Reserve Bank of New Zealand will also have an interest rate announcement.  They have been crystal clear about their intentions to leave monetary policy on hold until the middle of next year and there is no reason for them to signal otherwise.  Finally, the most important economic release out of Australia next week will be their employment report.  Based upon the overall trend of the economy and the PMI reports, we anticipate continued job growth.  

USD/JPY: TAKING A SIGH OF RELIEF

We can plainly hear the sighs of relief coming from Japan after USD/JPY rose 2.50% in today’s trading session. Along with the fourth consecutive day of yen weakness, this has unraveled much of the Bank of Japan’s concerns and saved them from having to make an uncomfortable move in the currency markets. However, even with the yen falling the most in ten months, they are not out of the woods yet, as a more sustained rally in the dollar must be seen before we can decree that the impending currency crisis is over. We have not seen much in terms of economic data for the last few days, but more is on the way for the upcoming week. For next Monday, we are looking at the Current Account and Trade Balance. Even though the latest fall in the yen will not be reflected in trade numbers, it will still be interesting to see what the effects of falling to multi-decade lows in the yen had on the economy’s exports. Thereafter, we are looking at final Gross Domestic Product Tuesday night into Wednesday. Growth is expected to have subsided to 2.8%, after last quarter’s 4.8% surge. Lastly, we will see Consumer Confidence next Friday.

AUD/USD: Currency in Play for Next 24 Hours

The currency in play for next Monday is AUD/USD. We expect the release of Aig Construction Sector at 22:30GMT or 5:30PM EST on Sunday, followed by ANZ Job Advertisements at 00:30GMT or 7:30PM EST. U.S. will release Consumer Credit Report at 20:00GMT or 3:00PM EST on Monday. The once highflying Aussie is seemingly losing steam as the AUD/USD fell into the Sell Zone which we establish through Bollinger Bands and is poised to drift lower. The pair needs to break the resistance of upper 1st Standard Deviation at 0.9320 in order to negate the fresh downtrend otherwise the pair will likely test the 0.9000 level if current support of 50-day SMA at 0.9120 is breached.  

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Comments (14)

Rez

December 04, 2009 at 05:52 PM ET

As you have told in your previous commentary that for NFP the first move is not the actual one, data below 100k will be bearish for dollar ultimately. But today it was not seen.

Zack Choe

December 05, 2009 at 12:35 AM ET

I think the game plan has changed here. With better NFP numbers, I would think the traders are looking at what is going to be expected next from the results.
There is the expectation of rate hikes coming earlier than we thought though for these past few months, we have been assured that it will not be the case.
The dollar was bullish yesterday because of this expectation.
Not too sure if there was a knee jerk reaction, but from my charts eur/usd probably went up like for 10mins before going southwards..

cheers

FXDragon

December 05, 2009 at 04:53 AM ET

No matter that number was true or not, dont be so foolish to rush to dollar. I've seen such experts be so wrong many times. Investors know we have to see several repetitions of true good numbers before a rate hike. Also fed will also wanna see inflation prior to hiking. Its their purpose! Not to mention the benefits of weak dollar for gdp, exporters and stocks. Be smart and dont believe the hype. It still prints "In Euro We Trust" on the dollar:)

FXDragon

December 05, 2009 at 05:09 AM ET

Eventhough its kinda scary to be on opposite sides with Boris and Kathy:) I hope im right or i'll lose big time! Getting ready to buy eurusd again on Tuesday since that strong move will have some little more continuation. I support
Brad's eurusd recomm. eventhough i think it will move below 1.48 before reaching entry.

We'll see...

hsbc

December 05, 2009 at 07:12 AM ET

i had to say this fx dragon but i think u are wrong. i really do think that usd trend may have turned. i would buy usd on dip

FXDragon

December 05, 2009 at 09:17 AM ET

Thats what they said on the june top. Hope you dont blow up your account with usd. Good luck...

Semaj

December 05, 2009 at 09:24 AM ET

If 1.4800 on the eur/usd is taken out next week we will have marked a lower low on a daily chart and will likely head to 1.4500-1.4450ish given the trendline break of the bullish move since March. That is close to the daily 200 ema and the June thru August conjestion area. Good area to start thinking long again UNLESS the commercial side of banking gives us the next crisis for a flight to safety in usd. Longer term analysis given the strong moves from NFP if we CANT get thru 1.50ish area again. With a strong selloff in gold the aud/usd should move in tandem with the eur/usd and perhaps the best short will be in the gbp should the eur/gbp go north from here.

FXLrn

December 05, 2009 at 10:47 AM ET

I agree with FXDragon. Things wil change with any statement from Fed reg lower interest rates for long term and the payroll numbers are not going to sustain after Chrismas. I have buy orders for AUD at 9050, 9000 and 8934.

FXDragon

December 05, 2009 at 10:59 AM ET

I mainly deal with credit default swaps arbitrage and cfd's and spread bets for commodities and oil. But i asked our fx spot guys, they said there will be range trading in eurusd for some time and no trend change. So relax:)

Also they said Brad's eurusd 1.5338 target wont reach for a while, however the usdcad rocomm. is very likely. I trust them so.

Gary

December 05, 2009 at 11:28 AM ET

I believe we will get a stregthening USD for awhile (2 days to a month). One though that crossed my mind is that this would make Bernakes re-appointment easier and even more interesting is that it would weaken the forces in Congress that want to weaken the Federal Reserves powers. How this could be engineered I have no details for, but that the Fed Reserve could influence at least these directions for a while I find plausible. Then - as often with manipulations - eventually the longer larger forces return, which I think will be the dollar falling again. The debt certainly being a driver, and the low low interest, and Asian strength over the long term.
Isn't it interesting trying to get in front of a wave? Yes, usually.
G

FXDragon

December 05, 2009 at 05:36 PM ET

I thought Big Ben got reelected already. Yea then that nfp might be fony. The job summit (whatever the hell that means) takes place... and... tataaa! No More Job Losses! Have you tested Obama Magic Mushrooms:) Dollar has at least six months of more weight loss hopefully.

hsbc

December 05, 2009 at 07:50 PM ET

for aud i agree taht u hv holding power and it makes sense to bottom pick. for eur carry isnt exactly great but at least long is positive. however the yield differential model was pricing in completley no fed move. when u get a rosy number and with next yr's forecast (u can check out DB's fx forecast) on most traders' mind (its already dec) then any small move would cause most to reconsider. at the end of the day we are trader's not politicians and we are only after a few pips. its no point being stubborn and going against the mkt. good luck mate.

Keith Jones

December 06, 2009 at 03:59 AM ET

EUR/USD. On the weekly and daily charts the candlesticks are bearish (but unconvincingly). On the daily chart, price closed below both the long term uptrend line and the 50 SMA. The NFP data was very USD bullish so it looks like on balance an obvious short. However, we shouldn't forget Kathy's report "Forex Trading Patterns", in which it points to very large EURO repatriation flows in December. Maybe those repatriating will let the downward momentum go to a lower level before pulling the "buy" trigger to get a better price (early Christmas present).

The NFP data is dubious for the resons stated in this report, but also due to the fact that the NFP data is often manipulated by the guesswork of the Birth Death adjustments. It is also suspicious coming at the beginning of the Christmas shopping season. It may just convince people that they can spend a little more than they otherwise would have.

yen-jan

December 06, 2009 at 06:16 PM ET

Friday's Commitment of Traders showed that there was a big build-up of short $ positions in the week ending Tues. Dec 1 -- so the market was really caught on the wrong foot by the NFP. NFP and unemployment are such important numbers that they often set the tone for the next whole month. Both of these factors suggest "continuation", as Kathy said. By the same token, the number was such a surprise that the market will be looking anxiously for confirmation in other data. However, US data is light in the early part of this week. Major Fed speak on Monday (Bernanke, Dudley) could be market moving.

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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.