The June U.S. Non Farm Payrolls Report showed that employers cut more jobs last month than estimated, curtailing demand for higher-risk, higher-yielding assets while sending the U.S. Dollar sharply higher.
Pre-report guesses indicated that traders were positioning themselves for a job loss of 365,000. The Dollar rose sharply higher when the U.S. Labor Department reported a total loss of 467,000. The unemployment rate rose to 9.5%, slightly better than the estimate but nonetheless setting the stage for a possible move to double-digits sometime in the near future.
The surprise weakness in the U.S. employment picture drove investors into the Dollar as traders became more averse to risk and attracted to the relative safety of the Greenback. This report was another sign that forecasts of green shoots in the economy may have been overblown. At this time it looks as if sentiment indicators may have mislead investors into thinking the economy was on the road to recovery while hard economic reports such as consumer inflation and GDP were showing a slowdown in growth and indications that there would be no rapid recovery.
Today's report may have been the evidence that Dollar bulls needed to prove that the end of the recession is not near.
In early trading on Thursday ahead of the U.S. employment report the U.S. Dollar was trading firmer. Overnight, China dropped its hard line stand against the Dollar's status as the world's reserve currency and called for a more stable Dollar. This squashed speculation that had been brewing all week that China would introduce a new international currency at the next Group of Eight meeting.
Not to be overlooked, the European Central Bank had its monthly meeting today. The consensus going into the meeting was that the central bank would leave interest rates alone despite room to cut. The ECB came through as expected and left its benchmark interest rate at 1.0%.
The already weakening Euro declined after the announcement and the break accelerated even further when a comment from European Central Bank President Trichet said a phase of recovery for the Euro Zone will probably start in the middle of 2010. This was an indication that the EZ economy was not improving and would probably need additional stimulus. Traders that had been expecting a comment on an exit strategy were disappointed and reacted by selling the EUR USD.
The GBP USD continued to feel downside pressure that began earlier in the week when the government announced that the U.K. GDP had contracted by 2.4% in the first quarter. A Bank of England official helped push this market even lower by stating that he saw no evidence that the end of the recession was near. He also threw out there his opinion that U.K. banks still remained on life support. Furthermore, BoE Governor King is already on record stating that the road to recovery would be long and hard. Technically this market is in a position to post a reversal top on a weekly basis which would be a potentially bearish signal.
Although the unemployment report is considered to be a lagging indicator, it still carried a lot of weight today and showed that investor confidence in a recovery is beginning to crack. Next week the U.S. begins to report corporate earnings. If corporations do not deliver good news look for the Dollar to rally even further as traders will once again seek safety and shun risky assets and currencies.
Please do not hesitate to contact us at 1-800-971-2440, with any questions.
DISCLAIMER: Forex (off-exchange foreign currency futures and options or FX) trading involves substantial risk of loss and is not suitable for every investor. The value of currencies may fluctuate and investors may lose all or more than their original investments. Risks also include, but are not limited to, the potential for changing political and/or economic conditions that may substantially affect the price and/or liquidity of a currency. The impact of seasonal and geopolitical events is already factored into market prices. Prices in the underlying cash or physical markets do not necessarily move in tandem with futures and options prices. The leveraged nature of FX trading means that any market movement will have an equally proportional effect on your deposited funds and such may work against you as well as for you. In no event should the content of this correspondence be construed as an express or implied promise or guarantee from B.I.G. Forex, LLC and Brewer Investment Group, LLC or its subsidiaries and/or affiliates that you will profit or that losses can or will be limited in any manner whatsoever. Loss-limiting strategies such as stop loss orders may not be effective because market conditions may make it impossible to execute such orders. Likewise, strategies using combinations of positions such as spread or straddle trades may be just as risky as simple long and short positions. Past results are no indication of future performance. Information contained in this correspondence is intended for informational purposes only and was obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted.