USD: A Sense Of Optimism

Posted by: Kiara Eva / On: July 7, 2011 / No Comments »

  The main reason why investors are optimistic is because of the surprisingly strong private sector job growth reported by ADP.  Before the ADP number was released, no one had particularly high hopes for Friday’s non-farm payrolls report but after seeing U.S. companies add more than 150k jobs last month, some are now hoping that payrolls could rise as much as 200k.  Consumer spending is also on the rise according to the latest ICSC and Redbook retail sales reports.  The International Council of Shopping Centers said retail sales rose 6.9 percent yoy in the month of June compared to 5.4 percent in May. Yesterday Johnson Redbook also reported a 0.9 percent rise in chain store sales.  The official retail sales report is scheduled for release next week and based upon these indicators, there is a good chance consumer spending rebounded after falling 0.2 percent in May.

However the first test of consumer sentiment will be based upon the size of the rebound in non-farm payrolls.  Last month, investors were crushed when they saw that only 54k jobs were created in May, about a third of what economists had predicted.      This month, payrolls are expected to rebound but economic indicators have been mixed and the degree of recovery in the labor market remains unclear.  If non-farm payrolls rise less than 100k then it would indicate that the U.S. economy is in serious trouble. If it rebounds like everyone hopes, then the Federal Reserve can breathe a sigh of relief. The main reason why economists expect non-farm payrolls to increase is because of how weak last month’s report was. Non-farm payrolls rose by only 54k the smallest increase in 8 months.   According to ADP, the private sector also added 157k jobs in, which was not only much stronger than the market’s 70k forecast but also well above tomorrow’s NFP estimates.  ADP is notorious for undercounting payroll growth but has been fairly accurate directionally. The decline in jobless claims from 432 to 418k last week was also very encouraging and suggests that the labor market has continued to improve into July.  The four week average of jobless claims was virtually unchanged from May to June.  However there are some areas of concern with the employment component of non-manufacturing ISM remaining unchanged.  Challenger Grey & Christmas reported the first increase in layoffs since February while both the University of Michigan and the Conference Board Consumer Confidence surveys reported deterioration in consumer sentiment.   Overall the labor market reports are consistent with overall weakness in the U.S. economy. The labor market is expected to rebound in June after a particularly abysmal May but nothing in the recent numbers suggests that we will have a blowout non-farm payrolls number tomorrow that could change the Federal Reserve’s monetary policy plans.

EUR: ECB RAISES RATES, EXPECTS RECOVERY TO PICK UP

The European Central Bank raised interest rates by 25bp for the second time this year, driving the euro higher against the U.S. dollar.  The main takeaway from ECB President Trichet’s press conference this morning is that the central bank is not done raising interest rates, but wants to wait at least another month or two before tightening again. Trichet deliberately left out the words “strong vigilance” from his comments which basically imply that interest rates will remain unchanged in August. With that in mind however, in no way is the rate hike cycle over and for this reason, the EUR/USD extended higher after some initial volatility. By saying that inflation risks remain to the upside and monetary policy remains accommodative, Trichet is also telling us that they are on track to raise rates again in the fourth quarter if not sooner.  The reason why they are not doling out back to back rate hikes is because the uncertainty remains elevated and recent economic data has shown a deceleration in growth. The EU Stress test results are also due next week and the ECB wants to avoid raising rates immediately thereafter because the results are expected to show capital issues in a number of banks. At the same time, the central bank also cannot ignore the financing issues in other parts of the Eurozone even though they have said that it does not affect monetary policy. After initially selling off, the EUR/USD rebounded because at the end of the day, the ECB is the only major central bank raising rates.  Trichet is not particularly worried about the recent disappointments in economic data because he believes there is “positive underlying momentum” in the economy and once the European sovereign debt crisis is pacified, he will raise rates once again.  German industrial production rose 1.2 percent in May a sign that the manufacturing sector in the region’s largest economy may not be performing as poorly as feared.  In the meantime, the ECB threw Portugal another lifeline by suspending collateral rules, allowing the country to post junk rated bonds as collateral and in turn helping them avoid a liquidity crisis.  Meanwhile the improvement in risk appetite drove the Swiss Franc lower against all of the major currencies.  The latest CPI numbers show consumer prices falling 0.2 percent in June. This is largely a function of a strong currency and lower commodity prices.

GBP: MISSING OUT ON THE ACTION

The British pound was the only high beta that failed to participate in the risk rally.  Although the Bank of England held its cash rate steady at 0.5 percent, the stance of the MPC would not be clear until the minutes published two weeks later. With a focus to aid economic recovery, BoE kept the interest rates at record-low despite the inflation accelerating to 4.5 percent, more than twice the bank’s target. Defending his stance on Jun 28, Governor Mervyn King said the bank can hold off raising rates if there is a risk of “undesirable volatility in output” and also warned of threats to the U.K. from the debt crisis in the euro area. Furthermore, the UK economy slowed to near-stagnation in the second quarter, according to a report published by the independent National Institute of Economic and Social Research. Although the report suggested the growth was depressed by several one-off factors – Royal wedding, long Easter holiday, and Japanese tsunami, the country’s underlying rate of expansion is still weak. In May, UK sees a 2.8 percent year over year increase in manufacturing production versus 1.2 percent in April. According to the Office of National Statistics, the largest contributors were the food & drink industries and the machinery & equipment industries with 4.7 percent and 5.9 percent respectively. Furthermore, the ONS said it had received feedback from companies indicating that sales were returning to normal levels after the dip in April, while the effects of the Japanese tsunami were also easing in May. The overall production output decreased 0.8 percent on a year over year basis. The commodity and energy sectors made up the most of the decline with mining industries showing 18 percent drop and gas extraction outputting 19.6 percent less. As the inflationary pressure remains elevated and the economy sluggish, Governor King is likely to keep the accommodative monetary policy until more encouraging signs from the UK.  Looking ahead, the producer price index releasing tomorrow will likely stay high as BoE sticks with a more dovish policy.

CAD: SHRUGS OFF WEAKER IVEY, EMPLOYMENT NEXT

The Canadian, Australian and New Zealand dollars strengthened against the greenback with the NZD/USD rising to a record high in the process. The improvement in risk appetite has proved to be extremely positive for the commodity currencies because their economies are the most sensitive to global growth.  The Canadian dollar even shrugged a weaker IVEY PMI report that showed manufacturing activity slowing in the month of June. While IVEY PMI remains comfortably in expansionary territory and near its recent highs, the slowdown in activity is in line with what we have seen in other parts of the world.  Canadian employment numbers are scheduled for release tomorrow and based upon IVEY PMI, job growth should have slowed in the month of June.  The Canadian housing market on the other hand improved in May with house prices rising 0.4 percent.  There was no New Zealand economic data released overnight but the NZD/USD received a boost from the stronger Australian employment report.  According to our colleague Boris Schlossberg who covered this extensively last night, “Australian labor force gained a solid 23.4K new jobs in June – better than the 15.2K forecast and a marked improvement from the -0.5K loss the month prior. The unemployment rate remained at 4.9% – the fourth consecutive month that it held below the key 5% level while the participation rate rose to 65.6%.  The underlying details of the report were very strong as well with full time jobs recovering to 59.0K from 22.0k prior indicating that demand for labor remains robust despite evidence of slowdown in global growth.  The positive news on the employment front should bode well for Australian GDP growth in Q2 of this year and is likely to generate better consumer demand going forward as wage incomes increase.”

JPY: REBOUND IN MACHINERY ORDERS

The Japanese yen weakened against all the major currencies, with the exception of the Swiss franc, as investors seek higher yielding assets.  Japan’s machinery orders rose at the fastest pace in four months in May, pointing to companies increasing spending to restore business and production disrupted by the March 11 natural disasters.  Factory orders, a leading indicator of capital spending, turned to a 3 percent gain in May from April, the Cabinet Office said today in Tokyo, matching the forecast.  Companies are expecting profits to recover later this year and stepping up spending plans as manufacturers restore factories and the government rolls out stimulus.  Looking ahead, we believe orders will likely increase because of demand for rebuilding.   The Bank of Japan’s Tankan survey last week showed large companies plan to increase capital spending 4.2 percent in fiscal year 2011, exceeding analysts’ forecasts for a 2.4 percent increase.   In response to the machinery orders report, Japanese bonds declined, pushing yields on the 10- and 30-year securities to the highest level in two months.  Debt also fell on speculation Japan will need to issue more bonds to fund its reconstruction efforts.  Losses were lessened after demand rebounded at a 700 billion yen ($8.65 billion) auction of 30-year securities.  The spread between the 10- and 30-year yields widened to the most in three weeks after Prime Minister Naoto Kan said yesterday a “considerable” amount of government bonds will need to be issued to fund rebuilding.  Japanese retailers have been reporting upbeat results, suggesting the impact on consumer spending from the March disasters was not as bad as feared.   Processing fees to turn copper ore into metal will likely remain elevated next year after the earthquake shut smelting capacity and China imported less of the raw material.  Copper for three-month delivery rose to its highest level since April 27.  Bank lending year-over-year, along with the current account for the month of May will be released later this evening.  April’s current account was 0.55T and this month’s is expected to narrow to 0.19T indicating weaker currency demand from lower exports.

USD/CAD: Currency in Play for Next 24 Hours

USD/CAD will be our pair in play for the next 24 hours. From Canada, we expect the net change in employment and unemployment rate at 7:00AM ET/ 11:00 GMT. Across border, the US will release non-farm payrolls and unemployment rate at 8:30AM ET/ 12:30 GMT.

Reversing from its three-day climb, USD/CAD traded lower today and remained in a downtrend, which we determined using Bollinger Bands. If the US data surprises to the downside tomorrow, the pair could test 0.9552, the second lower Bollinger Band. If that level is broken, the recent swing low of 0.9445 would provide heavy support for USD/CAD. On the other hand, should the US data show more optimism, we might see a break of 0.9665, today’s high and recent price contention level. Furthermore, 0.9705 could provide major resistance as the 100-day SMA and 50-day SMA converge at this level.

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