USD Mixed, ADP Employment Losses Less than Expected

  • USD : Mixed, smaller than expected decline in ADP job losses boosts risk sentiment
  • JPY : Flat, pressured in cross trade, tracking risk sentiment, Japanese markets closed until Thursday
  • EUR : Mixed, services PMI rises, ECB officials suggest that rate cuts and liquidity measures are working
  • GBP : Mixed, services PMI rises, gains limited by falling house prices and NIESR cut of UK growth forecast
  • CAD and AUD : AUD & CAD higher, Aus. retail sales/trade balance rise, Canadian building permits jump

Overview

USD traded mixed tracking risk sentiment. A Reuters report that the BOA may need 34 bln more in fresh capital than original reports of 10 Billion, sparked a dip in risk appetite and light demand for the USD and JPY. US equity markets were trading lower after the BOA report. US bank stress test results are due for release Thursday. Much better than expected April ADP employment report helped to reverse early losses in US equities and pressured the USD. ADP job losses were the smallest since November, falling 491K. The ADP report suggests that Friday's US nonfarm payroll decline may be smaller than current market estimates. A smaller decline in US nonfarm payroll job losses could contribute to improving risk sentiment and speculation that the US economy is stabilizing. Testifying before the joint economic committee Wednesday, Fed Chairman Bernanke said that he sees return to growth by end of the year. According to Bernanke and the Feds Yellen, the rebound from recession will be slow. USD downside was limited as focus shifts to uncertain ECB policy outlook. Services PMI data in the UK and EU came in higher than expected generating hope that the European economies are nearing bottom. EUR and GBP traded higher in overseas trade supported by improving services PMI data with GBP gains limited by report of another drop in UK house prices and a sharp cut in UK 2009 growth forecast from NIESR. Commodity currencies traded higher tracking risk sentiment with the AUD outperforming supported by report of better than expected Australian retail sales and trade balance. CAD was supported by report of a sharp jump in Canadian building permits and better than expected Ivey PMI. Today's smaller than expected ADP jobs decline is a possible green shoot for US labor market and may reduce safe haven demand for USD.

Focus turns to: central bank policy meetings in Europe, the release of US bank stress test results Thursday and US unemployment report due for release Friday. The ECB policy meeting has the potential to set a new trend for the EUR, if the ECB adopts quantitative ease. Improving EU manufacturing and services PMI data and comments from ECB officials suggesting that prior rate cuts and liquidity measures have had an effect on the economy, will greatly reduce the likelihood that the ECB will adopt quantitative ease. The ECB is expected to cut interest rates 25 basis points and set the agenda for possible nonconventional monetary measures. The BOE is expected to hold rate policy steady. The trade is watching for whether the BOE intends to expand or contract its asset purchase program. According to the FDIC's Bair, the stress tests will be confidence instilling. US unemployment is expected to rise to 8.8% with another 608K loss of non farm payroll jobs. Many analysts may revise down there nfp estimates in light of today's much smaller than expected ADP employment decline. If the US employment report shows stability or improvement it will add additional support to optimism that the worst of global recession has passed. A better than expected US nonfarm payroll report will be less of a surprise to the trade in light of today's ADP employment report.

Today's US data:

ADP private-sector employment payrolls fall 491K compared to 742K in March, the trade was looking for ADP jobs loss of 650K. The ADP report suggests that April nonfarm payrolls will come in around -480K, and be well below the current consensus estimate of a decline of 608K. The ADP report does not always correlate closely with the BLS employment data. Last month, ADP reported about 80K more than expected job losses than the March nfp report. It is interesting to note that January nfp was revised down sharply to -741K from -655K an 86K increase.

Upcoming US:

On May 7th, initial jobless claims for week ending in 05/02 are due for release expected at 610K along with Q1 productivity expected at 0.4% compared to -0.4% last quarter. Also on May 7th, March consumer credit is due for release expected at -2.5bln compared to -7.48bln last month. On May 8th, April nonfarm payrolls will be released expected at -620K compared to -631K last month, along with the unemployment rate expected to rise to 8.8% from 8.5% in March.

JPY

Markets are closed in Japan until Thursday. JPY traded both sides of settlement initially supported by a dip in risk appetite and news that the BOA may need Billions more in fresh capital than originally reported. JPY turned lower in reaction to the report of much better than expected US ADP data. The smaller than expected drop in ADP job losses boosted equity markets and risk sentiment dampening safe haven demand for the JPY. JPY was also pressured in cross trade to Europe and Australia with EUR and GBP supported by report of better than expected services PMI data in the EU and UK and AUD supported by report of better than expected Australian retail sales and trade data. Japanese markets reopen Thursday as the Golden week holiday winds down. JPY direction remains closely correlated to risk sentiment and the direction of equity markets. Global equity markets are trading near three-month high supported by speculation that the worst global recession is passed.

The next scheduled economic release from Japan is the May 8th release of March leading indicators.

Key technical levels to watch in USD/JPY include support at 97.20 the April 30th low with resistance at 99.75 the April 17th high and 100.75 the April13th high.

EUR

EUR traded mixed initially supported by report of better than expected EU services PMI and a smaller than expected decline in the ADP employment report. EU April PMI services index rises to 43.8 from 40.9 last month. In reaction to the report of the rise in EU services PMI index, the ECB's Tumpel Gugerell said that that rate cuts and liquidity measures have had an effect on the economy. His comments dampen the chance that the ECB will consider aggressive rate cuts at Thursday's ECB policy meeting and greatly reduce the likelihood that the ECB will implement quantitative ease at this time. EUR traded in a choppy range with early selling pressure attributed to report of BOA's need for additional fresh capital, which was offset by buying sparked by report of smaller than expected decline in US ADP employment report and firmer US equity market trade. Report that EU March retail sales fall 0.6% had limited impact on EUR trade. EUR sold off midsession pressured by uncertainty about ECB policy outlook.

Focus turns to the May 7th ECB policy meeting. The ECB is expected to cut rates 25 basis points to 1% and layout its agenda for unconventional monetary policy measures. The trade will be looking to see whether the ECB sets a floor for a low limit on interest rate cuts and if the ECB is prepared to implement nonstandard monetary measures at this time. If the ECB stops short of implementing new non standard policy measures at the May meeting, then the EUR may experience a modest rally similar to demand that emerged in the CAD when the BOC presented the details of its quantitative ease but delayed implementation of these measures. If the ECB elects to implement non-standard policy measures the EUR may experience near-term selling pressure as the action by the ECB would confirm concerns about EU economic outlook. Based on improving EU economic data, the ECB most likely will take a wait and see approach as to whether implementation of nonstandard policy measures will be needed. The ECB may also extend liquidity auctions from the current 6 months to 12 months.

German March trade balance and April industrial production will be released on May 8th.The German trade balance is expected to narrow to 8 Billion from 8.9 Billion last month. The German industrial production is expected to fall 1.3%.The preferred strategy for EUR is to buy the dips into support at 1.3130 and sell rallies into resistance at 1.3400. EUR rallies will likely be limited by ECB rate cut speculation.

The technical outlook for the EUR is mixed as EUR rallies stall abvoe1.3400. Expect EUR support at 1.3190 the April 30th low with resistance at 1.3440 the May 5th high and 1.3520.

GBP

GBP edged higher supported by report of better than expected UK services PMI with gains limited by report of another decline in UK house prices and a downgrade of UK growth forecast. UK April services PMI rises to 48.7 from 45.5 last month. UK April Halifax house prices declined 1.7%. NIESR lowered its forecast for UK 2009 growth to -4.3% from -2.7%. NIESR also said it expects UK GDP debt ratio to rise to over 90% by the year 2013. Weaker UK house prices, lower growth outlook and concern about rising UK government debt limits today's GBP rally and sparked selling of the GBP in cross trade to the EUR. In addition, the BBC reports that UK recession is the worst since the 1930's. Focus turns to BOE policy meeting and US bank stress test results Thursday. The BOE is expected to hold rate policy unchanged at 0.5%. The trade will be watching to see whether the BOE announces any change in the size or duration of its asset purchase program. The BOE is widely expected to maintain the current size and duration of its asset program. If the BOE elects to increase the size of its asset program, then the GBP would likely trade lower. If the BOE elects to reduce the size of its asset program, then the GBP will likely trade higher. US bank stress test results will be important for risk sentiment. Over the past few weeks there appears to have been optimism that the bank stress test results will confirm that most US large banks have adequate capital. Today's report that BOA may need additional 34 Billion in fresh capital may mean that the US bank stress test results might not be as positive as previously expected. The impact of the bank stress test results should be limited as focus quickly turns to Friday's release of US nfp. The trade will also be looking at this week's UK economic calendar for further signs of possible stabilization of the UK economy.

On May 8th, UK April PPI will be released expected unchanged at 0.2%.

The technical outlook for GBP is improving as GBP breaks above 1.5100. Expect near-term support at the 1.4835 the May 4th low with resistance at 1.5155 the January 12th high and 1.5370 the January 8th high.

CAD

CAD traded at a fresh six-month high supported by report of smaller than expected decline in US ADP employment report, a sharp jump in Canadian building permits and better than expected Ivey PMI. Smaller ADP employment decline boosts risk sentiment and generates speculation that the US economy is nearing a bottom. Canadian March building permits surged 23.5%. Canadian building permits posted their biggest rise since December 2005. April Ivey PMI rose to 53.7 from 43.2 last month. The April PMI was expected at 42. The surge in Canadian building permits and Ivey PMI is further confirmation that the Canadian economy is likely to rebound faster than its counterparts when the global economy recovers. Today's Canadian building permits report and Ivey PMI are added justification for the BOC's decision to delay implementation of quantitative ease. The fact that the BOC did not follow the BOE and FED and adopt quantitative ease is a positive for the CAD. Further CAD gains will hinge on whether global equity markets can build on recent gains. CAD upside was limited by continuing concerns about US banks. As noted above, Reuters reported that BOA may need three times as much fresh capital than originally reported. Because the CAD has made significant gains over the past weeks, buyers may pause and wait to see the results of US bank stress test Thursday before adding to long CAD positions. This weeks key focus will be on Friday's unemployment report in the US and Canada. The CAD has rallied despite mixed Canadian economic data. Another Jump in unemployment could slow demand for the CAD. Canada's unemployment rate is expected to top 8% with an additional 40K loss of jobs. The preferred strategy is to sell USD/CAD on rallies to 1.2000.

On May 8th, April unemployment and housing starts will be released. The unemployment rate is expected to rise to 8.1% from 8% and employment growth is expected at -40K compared to -61.3K last month. Housing starts are expected at 155 K compared to 134.7 K last month.

The technical outlook for CAD has improved with this week's break of key technical support at 1.1700. Look for near-term resistance at 1.1900 the May 4th high with support at support at 1.1655 the November 10th low. Expect major USD/CAD support at 1.1465 the November 5th low. A break 1.1465 may spark speculation that CAD will trade towards parity into year end.

AUD

AUD traded sharply higher supported by better than expected Australian retail sales and trade balance. March retail sales rose 2.2% and the March trade surplus widened to 2.5 Billion. Retail sales were expected to rise just 0.5% and the trade surplus was expected to narrow to 1.85 Billion. These reports suggest that the Australian domestic economy is stabilizing and global demand may be improving. Tuesday the RBA elected to hold rate policy steady at 3%. Steady RBA rate policy coupled with improving risk appetite adds to demand for AUD. AUD is also supported by report from China's PBOC that China's recovery is expected to begin in 2010 with GDP expected at 7% to 8%. China is a major export destination for Australia and improving growth in China is positive for the Australian export outlook. Monday China reported that April PMI rose to 50.1. The improvement in China's PMI generates speculation that the worst is over for the global economy. AUD was also supported by report of less than expected loss in April ADP employment report rankings and gains in cross trade to the JPY. The better than expected ADP employment report is additional evidence that the contraction of the US economy is slowing and recovery may be around the corner. AUD/JPY traded over 1% higher with AUD supported by improving global economic outlook which helps generate demand for high-yield assets. The preferred strategy is to buy dips into support above 7250. The main risk to further AUD rally is a potential shift in risk sentiment that may result from Thursday's release of US bank stress test results. In overseas trade, AUD was pressured after the release of a Reuters report that Bank of America may need 34bln more in capital. The BOA fresh capital news sparked reduction in risk positions.

On May 7th, April unemployment will be released expected to rise to 5.9% from 5% last month, along with jobs loss expected at -25K compared to -34.7K last month.

The technical outlook for the AUD has improved as AUD trades above 7400. If AUD continues to hold, expect a possible test of 7600. Look for AUD support at 7336 the May 6th low with resistance at 7560. Expect major AUD resistance at 7745 October 6th high.