Dollar pushes higher after weekly jobless claims break a string of five weekly back-to-back gains, showing a decline of 19,000 to 318,000 from a revised 337,000. But the four-week average stands at 325,750, its highest level in five months. The decline doesn’t take away from the recent rising trend, nor alleviates concerns of seeing an increase in the unemployment rate to 4.7% in tomorrow’s non-farm payroll (NFP).
We could see further dollar gains against the European currencies as the ECB eases its 2007 growth projections and its much-needed emphasis on the credit market tensions.
All G10 central banks meeting so far this week kept interest rates unchanged despite their inflation- fighting priorities as the credit shakeout has sent inter-bank rates to multi-month highs, reflecting banks’ hoarding of funds. While the downward correction in world equity markets has shown signs of stability, banks’ access to credit is proving increasingly difficult despite the injections of liquidity from central banks and the use of the discount window. Superior economic data in the Euro zone and the United Kingdom have taken a back seat to the deterioration in money market conditions. Meanwhile in the United States , macroeconomic data are drawing more attention as the broadening weakness in housing is reaching to the labor markets, previously a steady source of income to the U.S. consumer.
The 10 am release of the August services ISM is seen at 54.5 from 55.8. All eyes will be on the employment index, which eased to 52.8 in July from 56.9 and 57.4 in June and May respectively. With services accounting for over 80% of the economy, the report may be expected to capture some of the employment consequences of last month’s credit fallout.
Wednesday’s ADP estimate for August private payrolls slumped to 38,000 after plummeting to 48,000 in July from June’s 150,000, prompting Macroeconomic Advisors – the organization in charge with estimating the ADP figures – to forecast a 60,000 figure for August non-farm payrolls. An NFP figure below 100,000 following July’s 92,000 would make the first back-to-back monthly NFP below 100,000 since summer 2003, when the Fed was in the midst of its easing campaign. Our NFP forecast stands at 90,000. The ADP’s estimate of the July decline in private payrolls correctly predicted the direction in the change of July non-farm payrolls, which fell to a five-month low of 92,000 from 126,000. Over the past year, the ADP’s track record in predicting NFP stood between 67% to 70%. The 38,000 figure suggests that any recovery from July 92,000 payrolls may be unlikely, which is a blow for the employment-driven support to the U.S. consumer, especially amid the recent increase in weekly jobless claims and expected rise in the unemployment rate.
USD/JPY under renewed pressure
The overnight gains sustained in USD/JPY to 116.45 proved short-lived as the pair is now making its way back towards the 115 figure. USD/JPY continues to display classic signs of bearishness despite its 500-point recovery from its 111.52 lows reached in August 17. We repeatedly warned of the persistent pattern of market selling on the highs as the frequency of risk aversion plays prevailed over the past two weeks. Not only is the argument valid from a market turmoil perspective, but also from a macroeconomic perspective as the Federal Reserve is compelled to reduce interest rates by at least 50-basis points this year, starting on September 18.
Interim support stands at 114.70, which is the 38% retracement of the 119.81-111.52 decline. Today’s release of U.S. weekly jobless claims, ISM services and Friday’s U.S. should provide with several opportunities of targeting 114.50. Upside capped at 115.40, followed by 115.65.
In the event of a surprisingly strong NFP on Friday (such as above 130,000), markets may actually sell-off on the argument that a strong report would dissuade the Fed from launching the much awaited rescue vest of a funds rate cut. A sell-off in equities would be another excuse to trigger further selling in USD/JPY. The unemployment rate will also be worth watching, especially after rising over the last three reports, reaching 4.647% in July.
Steady euro awaits Trichet conference
The current euro rally will be tested by European Central Bank (ECB) president Jean Claude Trichet’s conference at 8:30 am, where he is expected to balance the central bank’s active injection of liquidity with its duty to preempt inflationary pressures. To the extent that Trichet focuses on inflationary vigilance and the upside growth risks, the euro’s gains will follow. Although the chances that ECB rates will end the year at 4.0% stand above 70%, the prospects for renewed currency strengthening are expected to emerge from the downside risks to the U.S. economy as gross domestic product (GDP) growth is seen below 0.9% in the second quarter.
The U.S. ISM figures will play a major role in determining the euro’s fate at the 1.37 figure, especially if we see a figure below 52, which would be the lowest in five years. Support stands at 1.3610, followed by the 100-day moving average at 1.3575.
Cable eases after BoE decision/statement
Sterling loses ground after the Bank of England’s (BoE) decision to hold rates unchanged was accompanied by a statement acknowledging “heightened concerns about the variety of asset-backed securities” and “tentative signs of a slowing in consumer spending.” The central bank judged it is “too soon to tell how far the disruption in financial markets will impair the availability of credit to companies and households,” but did take into account the decline in CPI under the 2.0% target as well as muted pay pressures, all of which are dynamics that could prevent the BoE from raising rates.
Sterling has grown immune from losses in U.S. equities over the past sessions as the weakness in U.S. date pressured the dollar across the board. Thus, the combination of weak U.S. figures today with short-covering in stocks may prop cable at 2.0240.
Both the daily and four-hour charts suggest further losses to emerge towards the 2.0130, especially if we take out the 2.0160 target.
Ashraf Laidi
Chief FX Analyst
CMC Markets US
(212) 644-4220a.laidi@cmcmarkets.com
