IB FX View

Payroll confusion leaves currency traders in a spin

Friday September 4, 2009

Friday's employment report has offered little fresh insight over and above what we already knew about potentially weak consumption ahead. The currency market was primed for a violent reaction and indeed was provided with the opportunity to gyrate in both directions thanks to a lower payroll number accompanied by a higher overall rate of unemployment at 9.7%. The dollar's reaction is rather curious and while the greenback has settled to virtually unchanged against the dollars of Australia and Canada as well as the Japanese yen, it's far stronger against the Swiss franc while the euro and pound are looking decidedly wobbly in mid-morning trade.

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Neither bond nor equity prices are showing a similar performance. Treasury note prices are a little lower while the short end of the curve is ever so slightly flatter in gradient terms, there is little action apparent. Equity futures that were higher going into the number, immediately reacted less positively in response to the headline unemployment rate, yet the cash market continues to build on Thursday's gains.

The 9.7% headline rate for U.S. unemployment is the highest since 1983 and while it continues to increase, interest rate markets continue to cling onto low outright levels safe in the knowledge that the Fed does not typically raise rates until at least 12 months after the turning point in this data point. At 3.40% the yield on the benchmark 10-year note is still feeling the buzz from weakness in Asian stocks this week.

The jobless rate that receives far less fanfare is one that increases the rate to include part-time workers who would take full-time positions if they could. Add in those too disappointed with their search for employment and that would lift the overall rate to 16.8%, a half-point above the July reading. Clearly, ongoing concerns over consumption ahead are helping to lift the dollar somewhat today among those nations reliant upon both consumption and U.S. demand.

The dollar is taking back some of its earlier in the week losses against the Japanese yen, yet still commands a 92 handle against the yen at ¥92.86.

The commodity sensitive dollars are both higher against the U.S. unit today. This week has seen the price of crude oil diminish in line with earlier Chinese equity market losses. Curiously crude's price has hardly rebounded in line with the midweek turn around for equities. Over night comments from a Chinese official also boosted both Shanghai stocks and the Aussie dollar when it was reported that it might take years to implement stricter capital requirements for lenders. It was the recent fall in lending volumes and prospects for further curbs that sent Asian markets into a tailspin.

The Aussie today buys 84.44 U.S. cents and don't forget that the price of gold has been grabbing plenty of media attention this week as it applies for a job in the four-digit range, which would be the first time since February. Curiously, the price of gold didn't prove as responsive to the March low point for equities as it is today. Factor in a 50% subsequent rise in the S&P 500 index and the current response from gold looks suspicious.

The Canadian dollar today is also marginally stronger versus the dollar. Expectations for Canadian job losses totaling 15,000 were off base as its monthly reading showed the surprising creation of a net 27,500 mainly part-time losses. Still the report was hardly a quality one since the actual rate rose to an 11-year high at 8.7%. Economists expect a rise to 9.3% before the first quarter of 2010 despite the current signs of GDP growth. The Canadian dollar buys 91.70 U.S. cents after today's reports.

The euro is rebounding after earlier touching $1.4191 according to IB data and currently stands at $1.4230 after closing Thursday at $1.4255.

Meanwhile the pound has now rebounded to $1.6350 from an intraday $1.6286 low brought about by the jobs report today. There was little additional stress on the pound from a report showing a net decline in customer lending by two of Britain's largest banks. This is one of those anecdotal pieces of evidence explaining why the economic recovery is likely to be prolonged.

This weekend we'll be looking out for headlines from what promises to be a dull event in London drawing together financial chiefs from G20 nations. Exit strategies will be a much-debated topic with the emphasis on whether to discuss them rather than when to implement them.

Andrew Wilkinson                                                                    

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com