Dollar falls broadly as better-than-expected U.S. jobs data boosts risk appetite
The greenback dropped against most major currencies on Friday as better-than-expected U.S. non-farm payrolls eased recent worries on U.S. economic recovery and boosted demand for risky assets and higher-yielding currencies such as the Australian dollar.
Although the greenback traded narrowly against the Japanese yen in Asia and European morning, the pair jumped to 85.23 immediately after release of better-than-expected key U.S. jobs data. However, dollar retreated from there on profit-taking together with cross buying in yen versus other European currencies and later fell sharply to 84.23 after the release of much weaker-than-expected U.S. ISM manufacturing and then traded narrowly in NY afternoon.
U.S non-farm payrolls in August showed a drop of 54K jobs versus the forecast of -100K. However, private sector posted a surprise increase of 67K versus the forecast of +41K, suggesting employers were beginning to hire more people even during the summer month, allaying recent market concern that the world's largest economy may be moving back into recession and boosted appetite for risky assets such as commodity currencies i.e Australian dollar, New Zealand dollar and Canadian dollar .
U.S. ISM manufacturing PMI data came in at 51.5, versus the economists' forecast of 53.5 and the previous reading of 54.3 in July.
Earlier in Tokyo trading, Ichiro Ozawa, who is challenging Japanese Prime Minister Naoto Kan in DPJ's presidential election, said on a TV Asahi program that intervention in currency markets to stem the yen's appreciation was a possibility. He also added Japan could also use the strong yen to secure resources globally.
The single currency moved narrowly in Asia and price rebounded from 1.2808 to 1.2854 in Europe on slightly stronger-than-expected eurozone services PMI, which came in at 55.9 versus the expectations of 55.6. Later, despite euro's brief drop to 1.2814 after the release of U.S. jobs data, buying interest quickly emerged and euro rose to an intra-day high of 1.2898 in NY afternoon due to rally in U.S. stocks together with active cross buying in euro.
On data front, eurozone retail sales rose by 0.1% m/m and 1.1% y/y, versus the expectations of 0.2% and 0.6% respectively.
The British pound edged higher in Asia after Thursday's selloff to 1.5350 and climbed to 1.5452 in London morning. Despite intra-day brief but sharp fall to 1.5392 after the release of much weaker-than-expected U.K. Services PMI (U.K. CIPS services PMI came in at 51.3, much weaker than economists' forecast of 52.9), sterling rebounded strongly in tandem with eur/usd shortly after the U.S. jobs data and rose to as high as 1.5469 ahead of NY closing.
The commodity currencies rose strongly on Friday, as the Australian dollar and the New Zealand dollar rallied from 0.9066 to 0.9176 and 0.7132 to 0.7220. Usd/cad tumbled from 1.0569 to 1.0381.
In the global equity market, DJI rallied on Friday and closed the day at 10448, up by 128 points or 1.24%. FTSE-100, CAC-40 and DAX surged by 1.14%, 1.06% and 1.12% respectively. U.S. markets will be closed for the Labor Day holiday.
Economic data to be released next week include:
Japan BoJ 2-day meeting (U.S. and Canada are closed for holiday) on Monday, U.K. BRC retail sales, Australia RBA rate decision, Japan Leading indicators, BOJ rate decision, Swiss Jobless rate, Germany Factory orders on Tuesday, Japan Trade balance (jpy), Current account, Machine orders, Economic watch DI, Germany Trade balance (euro), Export, Import, Industrial prod'n, U.K. BRC shop price index, Industrial prod'n , Manufacturing prod'n, Canada Building permits, BOC rate decision, Ivey PMI, U.S. Fed's Beige Book on Wednesday, Australia Employment change , Unemployment rate, Japan Consumer confidence, Germany CPI final, HICP final, U.K. Trade balance (gbp), BOE rate decision, BOE Asset Purchase Target, U.S. Trade balance (usd), Jobless claims, Canada Housing starts, Trade balance (cad), Exports, Imports, New housing price index on Thursday, Japan Domestic CGPI, GDP Rev. , U.K. PPI core, PPI input, PPI output, Canada Unemployment rate, Jobs-change, U.S. Wholesale inventories on Friday.
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If you chart the course of the Australian Dollar over the last twelve months alongside the S&P 500, the overlap is jarring. You can see from the chart below that the two lines zig and zag in almost perfect unison. It would seem that there was a slight break in the second quarter of 2010, but even this is an illusion, since the Aussie and the S&P continued to rise and fall in the same patterns over that time period, differing only in degree of fluctuation.
Since the S&P 500 is a pretty good proxy for risk it can be said that the Australian Dollar is a manifestation of investor risk appetite. When risk aversion was high, the S&P and the Aussie were low. When risk tolerance picked up, they rose. It’s funny how this came to be. It is probably best seen as a vestige from the credit crisis, whereby investors evenly divided assets into two classes: risky and safe. When you look at the performance of the Australian Dollar, it is pretty clear as to which side of the dividing line it was placed.
This is probably fair, since the Australian Dollar is a growth currency. According to the just-released Bank of International Settlements (BIS) Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity, the Australian Dollar is now the world’s fifth most traded currency (behind only the G4: Dollar, Euro, Yen, & Pound), having usurped that position from the Swiss Franc. In 2010, it accounted for 7.6% (out of a total of 200%) of all trading volume, primarily as a result of trading in the USD/AUD currency pair, which was the fourth most popular in forex.
Investors have come to see the Australian Dollar in somewhat contradictory terms. It is both stable and liquid, but its economy is unpredictable and inflation is usually above average. The current economic situation was strong, with GDP growth projected to exceed 3% in 2010. Its benchmark interest rate (4.5%) is the highest in the industrialized world, and may touch 5% before the year is over. On the other hand, its political situation is currently uncertain, thanks to an election that produced a hung Parliament and the recent resignation of its Prime Minster. In addition, while its trade balance is currently in surplus, it fell in July thanks to decreased demand from China. Analysts wonder whether it isn’t entirely dependent on China (directly via exports and indirectly via high commodity prices) to generate positive GDP growth.
Ultimately, investors don’t care about any of this. They care only whether the global economy is stable and whether another financial/credit/economic crisis is likely to occur. Even though any such crisis will probably spare Australia, the Aussie is punished by even the whiff of crisis because Australia is perceived as being riskier to invest than the US, for example. “The Australian dollar is going to stay heavy. Markets don’t like uncertainty,” summarized JP Morgan.
Sadly, it’s currently not worth parsing the nuances of trade statistics and monetary policy, because it has no bearing on the Aussie, though at least this makes my job easier. For the time being, the Australian Dollar will tick up if it looks like the global economy (principally the US) will avoid a double-dip recession. Otherwise, it is in for the same rough stretch as the S&P.
By Mike Conlon | September 3, 2010
This morning, the US Non-Farm Payrolls report was the catalyst that has pushed the market higher as all eyes were glued to this news. The report came in better than expected, showing that payrolls decreased 54K vs. an expectation of a loss of 105K, but 67K private sector jobs were added. The unemployment rate came in at 9.6%.
While these numbers are far from excellent, the news that they were not worse than expected is seen as an encouraging sign that the economy here in the US may not be as bad as was previously thought. The major challenge that the US economy is facing is how to put people back to work.
Employment sparks the cycle of spending, consumption, then growth. The US consumer represents roughly two-thirds of US GDP; so if people are out of work they are not spending which reduces growth.
And while one reading does not make a trend, this is an encouraging sign after all of the doom and gloom experienced last month. However, we still have a LONG way to go with regard to the employment picture, as roughly 200K jobs added a month are needed just to keep pace with new entrants into the workforce. So before we get too excited, lets remember that the overall figure is still a LOSS of jobs. The fact that private sector job increased is the most positive take away from this report.
There is a dearth of news from around the globe, and the market is most definitely in risk taking mode.
In the forex market:
Aussie (AUD): The Aussie is higher this morning as risk appetite has increased. A report out of Goldman Sachs said that the RBA could begin raising rates again in November. (Click chart to enlarge)
Kiwi (NZD): The Kiwi is also higher on risk appetite and the lack of news has it trading on risk themes.
Loonie (CAD): The Loonie is also higher on risk appetite as oil prices have rebounded from earlier lows and are back above $75. In addition, the Loonie has been beaten up pretty badly of late as the negative news of last month has mostly been coming from the US economy.
Euro (EUR): The Euro is trading mixed this morning, mostly lower against the commodity currencies but higher vs. Dollar and Yen. Euro zone PMI figures came in slightly better than expected but retail sales for the month were lower by .1% vs. an expectation of a gain of .2%.
Pound (GBP): The Pound is catching a nice bounce today from risk appetite as austerity measures have affected recent economic data to the downside. So the Pound has been weaker of late, yet the UK economy still appears to be on the right track. However, PMI figures came in less than expected. (Click chart to enlarge)
Dollar (USD): The Dollar is weaker this morning as risk appetite due to the NFP report has been seen as encouraging. Much of the negative economic news in the global economy has been coming from the US, so a better than expected report is viewed as positive.
Yen (JPY): The Yen is weaker across the board as risk-taking has discouraged demand for safe havens. The Yen has been strengthening of late as the market is testing the resolve of policy-makers to intervene in the currency. (Click chart to enlarge)
The obvious driver of markets today is the Non-Farm Payrolls and the better-than-expected result has encouraged risk appetite. Not to be a Debbie Downer, but this number still needs to improve immensely before we get back to normal.
Perhaps economic policy will change to further encourage business and hiring, but at this point I dont see it happening as quickly as it needs to.
Happy Labor Day to All!
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Euro rises due to solid European bond auctions ahead of U.S. non-farm payrolls
The single currency strengthened against the greenback on Thursday, as solid results from Spanish and French bond auctions boosted risk appetite and gave support to euro, however, investors remained cautious ahead of the release of US non-farm payrolls.
Although the single currency moved sideways on Thursday after Wednesday's rally from 1.2663 to 1.2856 and edged lower to an intra-day low of 1.2776 in Europe, euro rebounded from there and rose to 1.2838. Later, despite euro's brief fall to 1.2795 after the comments from ECB's Trichet, the pair staged a strong rebound and climbed to 1.2848 in NY before trading narrowly.
The single currency was supported by solid demand from Spanish and French bond auctions, as France and Spain sold a combined 12.2 billion euros of government bonds, with strong demand for longer-dated paper as investors were eager for higher-yield in the low growth environment.
ECB President Trichet said current ECB interest rates were appropriate and expected eurozone economy to grow at a moderate and uneven pace, and price developments to remain moderate over medium term horizon. Trichet said ECB would extend full allotments at all liquidity operations. He added downside risks included renewed financial market tensions, higher oil and commodity prices whilst upside risks included stronger global economy and tax increases.
Earlier, The European Central Bank kept interest rates at a record low of 1% as widely expected. In addition, eurozone GDP rose by 1.0% q/q and 1.9% y/y versus the downwardly revised 0.3% q/q and 0.8% y/y whilst PPI rose by 0.2% m/m and 4.0% y/y versus the readings of 0.3% m/m and 3.0% y/y in June.
Although the greenback fell from 84.55 in Asia on cross buying in yen after the release of smaller-than-expected Australian trade surplus (Australian trade surplus shrank to A$1.89 billion in July from a revised A$3.44 billion in June) and dropped to 84.00 in Europe, dollar pared its losses and rose to 84.46 after the release of U.S. job and pending home sales data. Dollar then retreated from there on renewed selling before trading sideways.
U.S. weekly jobless claims fell to 472,000 (the economists' forecast was 475,000) from upwardly revised 478,000 prior week. U.S. labor cost rose by 1.1% versus the forecast of a rise of 1.2% whilst productivity fell by 1.8% versus the expectations of a decrease of 1.9%. U.S. pending home sales index rose unexpectedly by 5.2% to 79.4 in July, suggesting a tax credit-related housing market decline was close to bottoming.
In addition, U.S. Fed Chairman Bernanke testified on Thursday and said that tough government follow-through on a freshly minted U.S. financial law would be crucial to ensure that no bank or firm grew so large that its collapse could jeopardize the entire economy.
In other news, Sandra Pianalto, President of the Federal Reserve Bank of Cleveland, said 'the U.S. Federal Reserve feels a great sense of urgency in getting the housing market back on its feet and a healthy housing sector is critical both to the overall economy and to a sustainable economic recovery'.
The British pound edged lower in Asia on profit-taking after Wednesday's rise from 1.5337 to 1.5492 and fell to 1.5373 in Europe on cross selling in sterling versus euro (eur/gbp surged from 0.8283 to 0.8348) after the release of weaker-than-expected U.K. housing data. Later, despite cable's brief recovery to 1.5417, renewed selling interest at there sent sterling lower and it dropped to 1.5350 in NY before staging a recovery.
U.K. Nationwide house price dropped by 0.9%, weaker than the economists' forecast of a decrease of 0.2%, whilst construction PMI came in at 52.1 versus the expectations of 53.2.
The market is focusing on U.S. non-farm payrolls which will be released at 12:30GMT on Friday, with expectations of falling in third straight month.
Economic data to be released on Friday include: Japan Business capex, Swiss CPI, Germany PMI service, EU PMI service, U.K. Services PMI, EU Retail sales, U.S. Unemployment rate, Avg. hourly earnings, ISM non-manufacturing.
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