The U.S. jobs report delivered a payrolls figure in line with expectations at 133,000, and the upward revisions of the prior two months, and the unemployment rate remaining at 4.5%, was helpful in temporarily stabilizing the dollar’s decline.
Nonetheless, the prolonged losses of manufacturing jobs for the 14th consecutive month and the 24,000 loss in retail jobs suggest that the recent improvement in manufacturing surveys is unsubstantiated by the continued loss in those jobs,; and renewed losses in retail employment raise the red flag in a sector that is widely relied on to carry the U.S. second quarter recovery. Indeed, Friday’s release of June retail sales may come in negative, showing a decline of 0.1% to .02% after a 1.4% rise in May and 0.1% decline in April.
The week’s vital events will kick off on Tuesday, with the Bank of Canada’s expected interest rate hike (9 am EST) and a speech by Federal Reserve Bank Chairman Ben S. Bernanke on inflation (1 pm EST) where he will likely shed more details on the importance of headline inflation amid the persistent climb in food and energy prices.
Due Thursday is the U.S. trade report, and on Friday is U.S. retail sales, and University of Michigan sentiment survey.
Euro’s resilience in face of U.S. payrolls suggests a new record is imminent The euro’s sharp rebound in the aftermath of its brief decline following Friday’s U.S. payrolls release not reflects increased confidence in the single currency amid FX traders but also a sign of the mixed picture conveyed in the jobs report. We had warned last week that U.S. payrolls would have to be gauged partly through manufacturing and retail jobs, especially as these sectors do not undergo the same volatility seen in hospitality, education and government jobs.
EUR/USD remains well within the reach of new record highs, especially as the lack of market-moving U.S. data may extend gains in U.S. equities, allowing prolonged risk appetite to boost the euro further. Tuesday’s inflation speech from Bernanke may place a dent on the markets and on the carry trades, including the single currency.
EUR/USD support seen holding at 1.3610, followed by 1.3575-80. Near-term target holding at 1.3640, but further moves seen capped at 1.3655-60.
USD/JPY nears turnaround point The return of risk appetite courtesy of Friday’s U.S. payrolls meeting expectations has triggered the usual plays of broad yen selling in favor of rising GBP, AUD, equities and gold. Shorting the yen ahead of this week’s BoJ decision and monthly report is not recommended, especially as USD/JPY nears considerable resistance at 124.
Having said, we do not rule out further gains in USD/JPY towards 123.85 in the event that the BoJ issues no signs of an upgrade in its outlook, especially amid continued declines in unemployment and recovery of household spending. And even in the case of renewed yen declines, we expect fresh rumblings about carry trades and Japanese officials reiterating their cautiousness with the speed of the yen’s decline as was the case two weeks ago.
Interim support stands at 123.20, followed by 123.00. Upside is capped 123.65, a breach of which will be partly dependent on the gains in U.S. equities. A close above 1,535 in the S&P 500 is seen instrumental in pushing up the pair towards 123.85.
Sterling turns to U.S. weakness Sterling shrugged a weaker than expected June PPI report, showing a 0.6% decline m/m but a 2.1% increase y/y. We do not rule out further gains in sterling towards the 2.0160s from the current 2.0140s. Key pressure seen standing at 2.0170. Traders will watch for any signs of whether the Bank of England’s tightening campaign has reached the end. The most important clue will not emerge until next week’s minutes. Tuesday’s trade figures will affect sterling (expected deficit at GBP 6.6 billion from GBP 6.3 billion), but it is the U.S. data that that will play the key role this week on the pair. Support stands at 2.0110.
Ashraf Laidi Chief FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY 10005 (212) 644-4220a.laidi@cmcmarkets.com
