Jan. 5, 2007 — Today’s payrolls report of 167,000 jobs considerably overshot the consensus forecasts of 100,000 to 110,000 and was well above the ADP survey estimate of -40,000 in private payrolls, has been instrumental in dragging the euro towards the 1.30 figure for the first time since Nov. 24. With average hourly earnings jumping 0.5% and the unemployment rate unchanged at 4.5%, the report gave a three-pronged boost to the U.S. currency.
Upon closer inspection of the report, manufacturing and construction jobs remained in the red, retail jobs returned to negative territory (-9,000) after the holiday hiring-related aberration in December of +38,000, while services jobs showed lower growth to 178,000 from 195,000. The charts below show that the three-month moving average continued to weaken in services, manufacturing and construction. The three-month average for total payrolls has declined to a five-month low of 136,000.
The principal positive element of today’s jobs report is the 0.5% jump in average-hourly earnings following a 0.3% rise (revised from 0.2%), which translated into a 4.1% year-over-year rise, the highest in five years. This is a promising development for maintaining personal consumption expenditure on track for a soft landing.
From a currency perspective, today’s report serves as an important distraction for what has appeared to be partial unwinding in yen and Swiss franc carry trades, as was witnessed over the past 12 to 15 hours in the rebound. Speculation that the Swiss National Bank would hold a special meeting to address the franc’s weakness is helping to dissipate outstanding shorts in CHF and JPY. The higher than expected payrolls are essential in supporting the dollar in the midst of the ensuing central bank diversification story, and continued data strength in the Euro zone. But with gold prices currently extending their losses from $627 yesterday to $610 , this raises the prospects for dragging the EUR/USD below the 1.30 figure for the first time since Nov. 24. EUR/USD support follows at 1.2980 and 1.2925. Cable seen holding at its two-and-a-half month trendline support of 1.9280, while USD/JPY is seen capped at 119.20.
Foreign central bank buying on the dips and emerging speculation of follow-up oil supply cut by OPEC in February should help cap the US currency’s gains.
The Japanese yen makes its biggest increase in nearly two months amid escalating expectations of January rate hike by the Bank of Japan. Adding to such speculation, Japan Finance Minister Omi said he would not interfere in the Bank of Japan’s decision making, a rare hands off approach by a Japanese politician towards the central bank. Equally significant, the yen’s rebound is being accompanied by broad strengthening in the Swiss franc, making a classic case of unwinding carry trades amid short covering in these low yielding currencies. The rise in the Swiss franc primarily has been spurred by rumors that the Swiss National Bank will hold a special meeting to discuss the excessive weakness of the franc. This carry trade unwinding has not only boosted the low yielding yen and franc, but also weighed on the high yielding currencies of the Aussie and U.S. dollar over the past 15 hours.
Weaker than expected U.S. payrolls to pare dollar gains
We expect today’s January U.S. employment report to show a 60,000 increase in payrolls, well below the consensus forecasts of 100,000 to 110,000; the unemployment rate to remain unchanged at 4.5% and average hourly earnings to grow by 0.2%, matching the rate in December. We mentioned last month that the 132,000 increase in December payrolls was primarily a result of an unusual increase of 20,000 in retail jobs, which should have largely been a result of temporary Thanksgiving and Christmas holiday related hiring, which will likely fade in January and February. This is especially notable considering that monthly payrolls in the retail sector averaged a decline of 9,000 in the first 10 months of 2006.
A payrolls figure below 80,000 is likely to be dollar negative, which could drag USD/JPY below 118 to as low as 117.70, drag USD/CAD to 1.17 and lift EUR/USD to as high as 1.3160. Expect sharper dollar losses in the event that the unemployment increases to 4.6%. Only a figure above 110,000 or 120,000 would help stabilize the dollar to the extent that it prevents USD/JPY from falling below 118 and maintain EUR/USD below 1.3120.
USD/JPY risks extending losses to 117.50
The combination of carry trade unwinding on the back of BoJ hike speculation and weak expectations for today’s U.S. payrolls is likely to trigger further weakness in USD/JPY, making the 117.70 retracement the interim target, followed by the 100-day moving average at 117.50. These losses are a very high possibility in the event of payrolls coming below 80,000. A figure between 80,000 and 100,000 may be dollar neutral, while a report above 105,000 to 100,000 may be instrumental in maintaining the pair around the 118.20-50 territory.
Euro requires Sub-80,000 payrolls for recovery
Euro stabilizes at our Thursday projected target of 1.3070 after broad declines, shrugging strong reports on Euro zone consumer confidence and unemployment. EUR/USD would require U.S. payrolls to come in below 80,000 to 85,000 to accumulate fresh buying towards the interim resistance of 1.3120. Central banks are likely to amass fresh bids towards 1.3150—the 38% retracement of the decline from the 1.3290 high. Support starts at 1.3070, followed by 1.3035-40.
Cable seen supported at two-and-a-half-month trendline
After falling towards our projected target of 1.9450 on Thursday, and as low as 1.9348, expect support to crop up near 1.9320, which is the trend line support starting from the Oct. 16 low. A weaker than expected payrolls is seen boosting the pair towards the 1.9450 resistance, followed by 1.9500. A figure above 105,000 to 100,000 is likely to test the 1.9330s and stabilize at 1.93.
Loony flies on strong Canadian jobs report
USD/CAD tumbles by more than half a cent to 1.1730 from 1.1780 after December payrolls rose by 61,600 from a 22,000 increase, overshooting expectations of a 13,000 rise. Equally significant was the drop in the unemployment rate to 6.1% from 6.3%.
The Canadian currency had been damaged mainly by plummeting oil prices, which hit their lowest level since mid-2005 due to higher than expected U.S. stockpiles and unusually warm winter weather in the U.S. Light sweet crude fell to as low as $55.35 per barrel, losing nearly 10% in the last two days and posting the biggest decline in two years. We expect more noise from OPEC about further supply cuts, in addition to the 500,000 drop scheduled for February as the cartel is affected by a negative combination of a falling dollar and falling oil price. This should lift prices back above the $60 per barrel and lend support to the Canadian currency.
We expect USD/CAD to make further pullback from its 12-month highs in the event of disappointment in U.S. payrolls. Interim support stands at 1.1720, followed by 1.1680. Upside capped at 1.1750.
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY 10005 (212) 644-4220 (212) 644-4222 faxa.laidi@cmcmarkets.com
