We anticipate a broad sell-off in the Japanese yen accompanied by a run-up in the broad equity indices in the aftermath of Friday’s payroll report as risk appetite trades are seen resurging across the board.
Trading in today’s markets is proving increasingly volatile, especially with the cusp of U.S. recession, accompanied by dollar-positive whipsaws and supported by sharp reductions in risk appetite. Maneuvering during tomorrow’s release of the U.S. December jobs report could prove equally challenging, as we expect a mixed combination of results from the payrolls figure, unemployment figure and the possibility of a presidential announcement of an economic stimulus package. The conclusion of such analysis is to expect an improvement in risk appetite, meaning broad declines in the Japanese yen, and a 50% possibility of seeing downside pressure on the euro, conditional on the factors to be visited below.
Before we go over tomorrow’s jobs report, it is important to remind of the reaction to last month’s release of the November report, whereby markets cheered a 94,000 release. Although the dismal figure came in below 100,000, it overshot consensus estimates of 85,000. The stronger than expected 0.5% increase in average hourly earnings was also a positive for the U.S. dollar on the interpretation that Fed would refrain from opting for the aggressive 50-bps cut option the following week. Indeed, the Fed did opt for the smaller rate cut option, only to come back and deliver massive liquidity injections, as did the European Central Bank, Bank of England and Bank of Canada.
In light of today’s release of the ADP report of 40,000 private jobs, we forecast a December payrolls figure of 70,000, considering the historical relationship between ADP and the BLS figures. After closely tracking the private payrolls figure issued by the Department of Labor between July and October, the ADP report completely over estimated the November figure, when it predicted a 189,000 figure against an actual private payrolls figure of 64,000 from the Department of Labor. We realize that the possible combinations can be daunting in determining market direction, especially when we add the unemployment rate and the element of revisions to the fray.
Rally Ahead for Yen Crosses
We expect the Japanese yen to come under pressure following the release of Friday’s report due to a resurgence of risk appetite. It is unclear whether this increase in risk appetite is to take place via either of the following routes:
1) A well received non-farm payrolls report that will ease concerns of a U.S. recession/contraction and be favorable for U.S. stocks at the expense of the yen;
2) A dismal report such as below 10,000 and/or an unemployment rate of at least 4.8%, which may be contained by either an inter-meeting rate cut, or another intervention by U.S. President George W. Bush announcing an overreaching economic stimulus package aimed at stabilizing jittery markets. We have already seen an inter-meeting Fed cut in the first week of 2001, when the central bank intervened following a dismal manufacturing ISM (formerly known as NAPM).
We also have already seen well-timed interventions from the Bush administration aimed at stabilizing market psychology, such as the recent sub-prime interest rate-freezing plan on Dec. 6, which boosted the S&P 500 by 1.2% to four-week high.
In conjunction with our forecast for a yen sell-off, we expect a broad rally in U.S. equities, with the S&P 500 testing the 1,470 level and the Dow at 13,250.
Chief FX Analyst
CMC Markets US