USD Higher as Smaller NFP Decline Fuels Recovery Hopes

  • USD: Higher, smallest nfp decline since last August fuels recovery hopes, bond yields spike higher
  • JPY: Lower, pressured by improving risk sentiment, selling in cross trade, election uncertainty in Japan
  • EUR: Lower, German exports rise and industrial output falls, pressured by US recovery hope
  • GBP: Lower, RBS posts large H1 loss, PPI rises more than expected
  • CAD and AUD: AUD & CAD lower, hawkish RBA policy statement, Canadian unemployment rises

Overview

USD traded higher Friday supported by report that US employers cut fewer jobs in July. USD experienced a volatile trade in reaction to report that US nonfarm payrolls posted the smallest decline since last August. US July nonfarm payrolls fell by just 247k compared to a revised 443k decline in June. The consensus estimate for the nfp was for a decline of -320k. Rumors had circulated before the release of today's report that the nfp could come in closer to -250k. Thursday's report of 38k drop in jobless claims for week ending August 1st also contributed to expectations that today's US unemployment report would confirm that the pace of job destruction in the US has slowed. The headline unemployment rate unexpectedly dropped to 9.4% from 9.5%. This marks the first drop in headline unemployment since April. The July unemployment rate was expected to rise to 9.6%. The initial reaction to the report of better than expected US July unemployment report was to send the dollar lower as the report will likely contribute to a continuation of improving risk appetite. The USD turned higher ignoring risk sentiment supported by speculation that today's report points towards recovery in the US economy. Today's US employment report generates speculation that the US economy will outperform other nations supporting the USD. The trade will be watching closely to see if the close correlation between equities/risk sentiment and the direction of the USD begins to delink.

There were a number of developments in overseas trade which contributed to choppy price action in the FX markets. The main feature of overseas trade was a surprise 25 basis point rate cut from the Russian central bank, a report that China's Construction bank may take action to cap lending by as much as 70% and report of a sharp H1 loss at RBS. In addition the RBA released its monetary policy statement. The Chinese news pressured Asian equities and generated concern about future growth outlook in Asia. The RBS loss sparked additional selling pressure in the GBP. The RBA monetary policy statement was seen as hawkish. The RBA said there was less need for further rate cuts and revised up its inflation and growth forecasts. AUD traded lower despite the RBA policy statement mainly focusing on the Chinese news. CAD traded lower pressured by report that Canadian employers cut more jobs in July than had been forecast. The weak Canadian jobs report offset the impact of the stronger equity markets and optimism about economic recovery in the US.USD traded sharply higher versus the JPY supported by improving risk sentiment as US equity markets hit a new high for 2009.JPY equity market correlation remains strong.

Today's US data:

US July nonfarm payrolls declined by 247k and the July unemployment rate was down 0.1% to 9.4%. This report points to stabilizing in the US labor market and suggests that the US recession may be nearing an end. White House officials suggest that US unemployment is still likely the top 10% before year-end and said that today's report suggests that the US economy is further away from the edge. A couple of factors to note about today's US unemployment report. Seasonal factors may have contributed to the improvement in the nonfarm payrolls. In addition, the drop in headline unemployment may reflect the fact that some workers have become discouraged and stopped looking for jobs and therefore are no longer included in the unemployment rate.

Upcoming US data:

Next week's US economic calendar includes the August 11th release Q2 productivity expected at 3.7% compared to 1.6% last month. Q2 unit labor costs will also be released on August 11th expected at-1.5% compared to 3% last quarter. June wholesale sales and inventories will also be released on August 11 th. Inventories are expected unchanged at -0.8% and sales are expected unchanged at 0.2%. On August 12th June trade balance will released expected at- 28.45bln compared to -25.96bln last month. On August 13th initial jobless claims for week ending 08/08 will be released expected at 535k compared to 550k last week. July retail sales and June business inventories will also be released on August 13th. Retail sales are expected to rise 0.3% compared to 1% last month. On August 14th July CPI will be released expected at 0.1% compared to 0.7% last month along with July industrial production and capacity utilization and August Michigan consumer sentiment. Industrial production is expected flat compared to -0.4% last month. Capacity utilization is expected to improve to 68.1 from 68 last month. University of Michigan consumer confidence is expected to prove to 68 from 66 last month.

JPY

JPY traded sharply lower pressured by improving risk sentiment fueled by report of better than expected US July employment data, a spike in US bond yields and heavy selling in cross trade. As noted above, the US July unemployment report indicates that job losses in the US are slowing and this will likely fuel fresh hopes for economic recovery and improving risk sentiment. US equities surged in reaction to today's US unemployment report. AUD/JPY traded more than 1% higher with AUD supported by hawkish RBA monetary policy statement. EUR/JPY and GBP/JPY crosses also traded higher with the EUR supported by report a sharp rise in German exports and GBP supported by report of better than expected UK PPI. The trade is not quite clear how to deal with report that China's Construction bank may take action to reduce lending by as much as 70%. This news could be supportive the JPY if the news sparks selling of Asian equities and fuels risk aversion. The Chinese news was overshadowed by today's positive US jobs report and a spike in US bond yields. Although it hasn't been receiving a great deal of press coverage on the FX wires uncertainty ahead of the August 30th Japanese national election may also be contributing to weaker JPY trade. Polls released yesterday indicated that the opposition party in Japan has widened its lead over the ruling LDP party. The LDP has ruled Japan for over 50 years and the August election is seen as the best chance yet that the LDP party will be removed from power.

Next weeks Japanese economic calendar includes the August 10th release of June machinery orders expected at -1.2% compared to -3% last month. Also on August 10th July money supply will be released expected unchanged at 0.1% along with the June current account expected at ¥0.90.trln compared to ¥1.30 trln in May. On August 12th July corporate goods orders will be released expected at -0.1% compared to -0.3% last month. Also on August 12th revised June industrial output is due for release expected at 2.6% compared to 5.7% last month. On August 14th June tertiary activity will be released expected at -0.3% compared to -0.1% last month.

Key technical levels to watch in USD/JPY include support at 95.05 the August 7th low with resistance at 95.90 the July 30th high and 97.00 July 1st high and 98.20.

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EUR

EUR traded lower ignoring improving risk sentiment and stronger equity market trade. The EUR was pressured by a spike in US bond yields and recovery hopes as US July unemployment beats expectations. Today's EUR price action was similar to prior price action the last time US nonfarm payrolls beat expectations in June with EUR ignoring improving risk sentiment and trading on speculation that the US recession is nearing an end. EUR downside of was limited by report of improving German trade balance and rising German exports. German June exports rose the most in three years reported up 7% and the German June trade balance widened 12.2 billion from 9.6 billion in May. The rise in the German exports raises hope that the EU economy is nearing a bottom as well. However, German June industrial output declined by 0.1%. Thursday the ECB elected to hold rate policy steady at 1% and forecast that the EU economy would gradually improve in 2010 with inflation turning positive. EUR is experiencing significant selling interest above 1.4400.Today's today's break of 1.4300 suggests that the EUR may be ripe for a deeper correction.

Next week's EU economic calendar includes the August 10th release of August Sentix index expected at -30 compared -31.3 last month. On August 11th July German final CPI will be released expected at 0.7% compared to 0.5% last month. On August 13th EU Q2 flash GDP is due for release expected at -1.1%. On August 14th EU July HICP will be released expected at 0.1% compared to flat last month.

The technical outlook for the EUR is turning negative as the EUR fails to hold will above 1.4400 and may be delinking from risk sentiment. Expect EUR support at 1.4200 and 1.4065 July 31st low with resistance at 1.4413 the August 7 th high.

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GBP

GBP traded lower extending Thursday's losses sparked by yesterday's surprise decision by the BOE to expand quantitative ease. GBP was also pressured by report of better than expected US July unemployment report and report of a large loss at RBS. As noted above, the USD firmed despite improving US employment data and firmer equity markets and rising risk appetite. GBP has been one of the most sensitive currencies to risk appetite and the direction of equities. If today's GBP weakness continues despite firmer equity market trade it may be an indication that the GBP is ripe for deeper correction. RBS reported a £1 bln H1 loss. The RBS loss may revive fears about the outlook for the European banks and financial system. GBP downside was limited by report the UK July PPI output prices rose 0.3%, the trade was looking for a flat figure. Core prices rose 2%, the trade was looking a 0.5% decline. An annual basis UK PPI fell 1.3%. The UK PPI data reduces the risk of deflation in the UK and may encourage the BOE to begin to consider exit strategies from and the possible timing for the end of quantitative ease. Thursday the BOE elected to extend quantitative ease by £50bln to a total of £75 billion and hold rate policy steady at 0.5%. The BOE decision to extend quantitative ease was directed at trying to boost the UK economy. The key question is how much further is the BOE is willing to go on quantitative ease? Today's UK PPI suggests that the BOE may be closer to the end of quantitative ease.

Next week's UK economic calendar includes the August 11th release of July BRC retail sales expected at 1.1% compared to 1.4% last month. Also on August 11th June trade balance will be released expected at -6.14bln compared to -6.26bln last month. On August 12th June unemployment will be released expected unchanged at 7.6% with claimant count expected to rise by 15k.

The technical outlook for GBP is mixed as GBP falls below 1.6800. Expect near-term support at 1.6696 the August 3rd low and 1.6520 with resistance at 1.7043 the August 4th high.

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CAD

CAD traded lower pressured by report of worse than expected Canadian unemployment below forecast Canadian manufacturing index and weaker crude prices. Canada's July unemployment rate was unchanged at 8.6% but employment growth fell by 45k. The trade had expected Canadian job loss of -15k. The fact that today's employment data from Canada and the US shows that the pace of US job losses has slowed and the pace of Canadian job losses increased in July sparked selling of the CAD. Canada's August Ivey manufactured PMI came in at 51.8, well below market expectations of a rise to 54.5.The threat of intervention remains the near-term focus for CAD trade. Late Tuesday, Canada's Finance Minister Flaherty said he is concerned with rapid changes in the CAD rate and that there are steps that can be taken to dampen the CAD's rapid appreciation. Flaherty's comments raise the risk of intervention to try to weaken the CAD. In late July, BOC Governor Carney said that stronger CAD versus the USD is an important brake on growth. CAD rallied 7.9% versus the USD in July supported by improving risk sentiment, rising equity and commodity markets and BOC's decision to refrain from implementing quantitative ease. Today's weak Canadian unemployment report could limit short-term gains for the CAD generating concern that the Canadian economic recovery will be moderate because of continuing loss of jobs.

Next week's Canadian economic calendar includes the August 12th release of June new Housing Price Index expected and on August 14th June manufacturing shipments will be released.

The technical outlook for CAD is mixed as USD/CAD rises back above low 1.0700. Look for near-term support at 1.0635 the August 4 th low with resistance at 1.0900.

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AUD

AUD traded both sides of settlement a number of times and experienced aggressive selling interest above 8400. AUD failed to hold gains inspired by the release of what was considered a hawkish monetary policy statement from the RBA. In its monetary policy statement for August the RBA said that it will look to move towards more normal interest rate policy and that there is less need for further rate cuts. The RBA went on to upgrade its inflation and growth forecasts. Tuesday, the RBA elected to hold rate policy steady at 3% and drop its easing bias. The RBA's policy decision Tuesday makes today's hawkish policy statement less of a surprise. The trade was also focused on reports that China Construction bank may look to reduce lending by 70%. If banks in China takes take action to try and reduce lending and this slows the Chinese economic recovery could be a negative for the Australian export outlook and Australian economy. It's not clear whether the RBA has been intervening to sell the AUD the last few days. In June the RBA aggressively sold record amount of AUD intervening to try to slow the AUD rise when the AUD approached 8300. It would not be surprising to find out that the RBA was active in today's trade as well. AUD attempted to rally after the release of better than expected US July employment report stronger US equities at rising risk appetite. Today's improvement in US unemployment data in rising equity markets helped to limit the AUD downside supporting the AUD time recovery hopes. AUD/JPY traded sharply higher with the cross mainly supported by improving risk appetite.

Next week's Australian economic calendar includes the August 10th release of June housing finance expected at 1.6% compared to 2.2% last month. June industrial and he will also be released on August 10th expected at 1.7% compared to 2.4% last month

The technical outlook for the AUD is positive as AUD rallies above 8400. Expect AUD support at 8235 the July 31st low with resistance at 8525 the September 22nd high.

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