Dec. 8, 2006 — The dollar tumbles across the board after U.S. November payrolls came in at a stronger than expected 132K, from a sharp downward revision in the October figure to 79K from 92K, while the unemployment rate rose to 4.5% from 4.4% in line with consensus. Average hourly earnings increased 0.2% from 0.3%, showing fading fears of wage-led inflation pressures. We maintain our 55% chance for a cut in January and 80% chance for a March cut
The dollar rose across the board on the stronger than expected payrolls, before turning the other way, gapping lower to new session lows. The prevailing argument that the rise in the unemployment rate and downward revision of an already weak October report, as well as the weak hourly earnings not only support the notion of a weakening economy, but reflect cooling inflationary risks, thereby allowing the Fed to explore easing policy in the first quarter.
Our forecast for a post-data dollar rebound was short-lived, as the negative sentiment in the U.S. currency proves increasingly negative. Rumors that China plans to widen the daily 0.3% fluctuation band against the U.S. dollar have been noted but not confirmed. We do not expect any outright revaluation announced during the Paulson/Bernanke visit, but we do not rule out an increase in the daily trading band. Note that the daily trading band with the EUR/JPY is at a wider 3.0%.
Optimism from the stronger than expected 132K increase in payrolls should be received with ambiguity, as we suspect that the bulk of the increase in services jobs may have emerged from holiday-related hiring efforts, which, we deem to be temporary.
The fact that retail jobs have shown an average monthly decline of 9K in the first 10 months of the year, makes the 20K increase an aberration that is largely a result of thanksgiving and Christmas Holiday related efforts, that are seen eroding after in January.
The dollar situation is worsened by the decline in the University of Michigan sentiment survey to 90.2 from 92.1, undershooting expectations of 92.
The key question is now to what extent will the Fed view the U.S. economic glass as full in Tuesday’s FOMC statement, while the U.S. economic glass continues to empty away.
We suspect the FOMC to continue to deem inflation as stabilizing but remaining above comfort levels, while shedding more ink to the slowdown in housing. More importantly, we see the dissent between market expectations and Fed rhetoric to extend into next week, leaving the dollar under a long-term weak bias.
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY 10005 (212) 644-4220 (212) 644-4222 fax a.laidi@cmcmarkets.com
