Despite a loss of 524,000 jobs and jump in the unemployment rate to 7.2%, the U.S. Dollar was able to finish the day and week on a higher note as the job loss was less than economists forecast. Traders are now digging in for a long, drawn out recession. Expect U.S. interest rates to remain at or near zero the rest of the year as traders are now forecasting almost no chance of an economic recovery in late 2009.
The EUR USD finished lower for the day and week as the deteriorating Euro Zone economy overbalanced the weak U.S. employment number. Earlier in the week the Euro came under pressure when it was announced that Euro Zone inflation was lower than forecast. This gave traders a strong reason to believe that the European Central Bank has room to cut interest rates to at least 2.0% at it next meeting on January 15. The only bright spot for the Euro this week was the better than expected Euro Zone Retail Sales Report. Although consumers are trying to hold up their end of the economy, it looks as if Trichet and his friends are going to have to cut again to try to revive the economy.
The Bank of England announced this week an expected 50 basis point cut in its key borrowing rate. The Pound showed strength throughout the week as traders perceived this rate cut as a sign that the BoE is slowing its aggressive interest rate cutting program. Traders bought the GBP USD when it became clear that the BoE was not going to join the Fed and the Bank of Japan and drop its important financing rate to zero. The move by the Bank of England may be a sign that a more creative economic stimulus plan is in the works.
The weak U.S. employment report did not stop speculators from buying the Dollar instead of the Swiss Franc on Friday. In fact the Swiss Franc was under pressure throughout the week as trader appetite for risk dropped dramatically as the stock market declined almost the whole week. A weak Euro Zone economy is threatening the Swiss banking system. This could lead to another interest rate cut by the Swiss National Bank.
The USD JPY rallied throughout the week as trader appetite for higher yielding assets fell and investors sought the safety of the lower yielding Yen. Watch the stock market next week for the direction of the Yen. If traders want risk then they will sell the Yen. If traders become adverse to risk then the Yen will gain. If the Yen gets too hot again, look for the Bank of Japan to take action especially if the trade gets volatile.
The weakness in the U.S. economy is spreading up north as evidenced by the weaker than expected Canadian Unemployment report. The weak U.S. Non-Farm Payroll report gave traders reason to believe the deepening recession is likely to continue and bring crude oil down with it. Lower crude oil would be another bad blow to the Canadian economy. Canadian exports are also suffering from reduced global demand.
Australian Dollars fell throughout the week as global equity markets weakened. Higher commodity prices kept the market from dropping sharply. Lower demand for higher yielding assets should continue to put downside pressure on the Aussie. The weaker the economy becomes, the greater the chance of an interest rate cut by the Reserve Bank of Australia at its next meeting.
The NZD USD finished this week better than it was last week, but nonetheless is still vulnerable to the same bearish factors as the Aussie Dollar. Trader appetite for more risky, higher yielding assets is needed to keep the current rally moving forward. Firm commodity markets are holding this pair up, but are vulnerable to downside pressure. Stronger industrial metals have been particularly helpful in keeping this currency strong. If the stock markets can stabilize, then look for more strength next week. The worst case scenario will be lower commodity and equity prices.
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