Turning to this morning’s April jobs report (non-farm payrolls down 20,000, unemployment rate down to 5.0% from 5.1%— both better than expected) , the main question will be whether non-farm payrolls and the unemployment rate will reflect sufficient pessimism to re-establish the market expectations for further interest rate cuts ahead. We have spilled much ink about our expectations for further job losses in the non-farm payrolls (household survey) and additional increases in the unemployment rate (establishment survey). Currency market volatility will likely extend into this last day of the week as the U.S. labor report is expected to deliver a predominantly weak showing, which may yet again swing the pendulum of expectations in the favor of further Fed rate cuts. We saw how the dollar tumbled across the board immediately after Wednesday’s FOMC policy statement, which indicated virtually no indication of a near-term pause in the current policy easing campaign. Although the FOMC did omit the forward- looking phrase indicating “the outlook for economic activity has weakened” and stuck mainly to giving a negative assessment to the current situation, the bulk of the statement remained as negative as in the March statement vis-à-vis the general economy and financial markets. Much ado was made about the FOMC’s omission of the forward-looking reference to weaker growth, interpreting the modification as signal of a willingness to pause. We interpret the omission as reflection of the Fed’s intention to pay more attention to inflation and to not further provoke fresh price pressures in the U.S. and the World as a result of otherwise stirring further interest rate cuts.
Despite the dollar’s post-Fed tumble, the currency suddenly rebounded sharply higher in European Thursday trading on reasons that remain subject to continue speculation. Pre-May1st Holiday position squaring by European players, especially ahead of the Friday jobs report started a wave of dollar buying and commodity selling, which accelerated into the U.S. Thursday session on stronger than expected 0.4% increase in March U.S. consumer spending and stronger than expected annual 2.0% increase in March annual core PCE (Fed’s favored inflation measure). The market shrugged the 35K increase in weekly jobless claims to 380K, which was higher than expectations of 370K.
The dollar shrugged more bad news when the manufacturing ISM remained under the 50 mark, signaling continued contraction. The index came in at 48.6, but it was unchanged from the March figure and above consensus forecasts for 47.5. Nonetheless, the employment component tumbled to a five-year low of 45.4 from 49.2, showing faster deterioration in the employment in the sector and may signal further gloom in today’s labor report. USD/JPY accumulated fresh increases on a combination of stronger than expected U.S. consumer spending and equity-market related gains relating to Kuwait ’s intentions to increase its investments in U.S. banks. Favorable corporate earnings were also instrumental in producing a close above the 1,405 level in the S&P 500. USD/JPY will test the 104.90 resistance in the event of better than expected showing in the labor report. Further run-ups are to boost the pair to as high as 105.30. Getting a read on the market reaction to US labor reports is a challenging proposition. Nonetheless, the general gauge of sentiment would be that any payrolls figure worse than a loss of 70-80K and/or an unemployment rate above 5.1%, is likely to trigger overall dollar weakness for the rest of the day, especially against the Japanese yen. The equity market impact on USD/JPY has already been demonstrated after the Fed decision showed little change, disappointing the dollar and equities. Key support starts as low as 104 backed by 103.60. EUR/USD attempts holding above the $1.5450 support, but any extended downside is seen steady at $1.5410. Although we deem the $1.5350 support as a major foundation, we’re unlikely to see this today. But a more general dynamic weighing on the euro is the anticipated meeting involving US Treasury Secretary Paulson, Fed Chairman Bernanke and the French PM, which should send expectations of an engineered recovery of the dollar. We continue to expect that ECB hawkishness will likely prevail over any political interference. A gloomy jobs report is expected to reaccelerate gains past $1.5520 and onto $1.5560.
GBP/USD strength emerged from stronger than expected UK manufacturing data emerging as a surprise in the midst of predominantly weak reports. The currency maintains its bid tone despite prolonged weakness in construction PMI. Cable eyes major trend line resistance at $1.9944, which we do not expect to be breached unless today’s jobs report combines triple digit losses and an unemployment rate of at least 5.1%. Support stands at $1.9820, backed by 1.9770.
Ashraf Laidi Chief FX Strategist CMC Markets US 140 Broadway, 30th Floor New York, NY 10005 Email: a.laidi@cmcmarkets.com
