Dollar catapulted by private job reading

The dollar is on something of a tear again this morning as investors binging on equities to start the year rolling in ebullient fashion are faced with a swift reversal according to pre-market indications. However, the chorus of support for an improving and indeed accelerating U.S. economy continues to be heard. The difficulty is in knowing which side to fall down on. One could argue that a recovery should lift risk appetite around the globe with investors grasping at the higher-hanging fruits. That has certainly been a dominant theme recently. Alternatively, one could take the Federal Reserve’s line that despite the bump in growth it’s too early to sound an economic all-clear, keeping the dollar supported as certain facets of the global economy are left with a hard-to-shake-hangover.

U.S. Dollar – In its latest meeting minutes the FOMC acknowledged both acceleration in activity between meetings and a boost to growth in the near-term owing to the tax-cut extension and factored in higher growth for this year and next. However, the committee noted that ongoing offsets included items that were likely to prevail for longer including lower housing prices, higher interest rates and higher oil prices as the economy recovered. The FOMC also expects the dollar to rise, which contrasts with openly expressed views from governments in Brazil, China and Germany, not to mention Republican politicians, that a second wave of quantitative easing would spark inflation and weaken the dollar. Not so, said the Fed in its minutes on Tuesday. Its bottom line remains the prospect for unemployment. Granted it’s going to take strong monthly numbers to push the rate of unemployment down on account of population growth. But looking at the colossal ADP reading of an additional 297,000 jobs during December, we could be in for some fireworks on Friday. The private-payroll processor’s estimate of jobs added is three-times consensus and has catapulted the dollar to a 0.8% gain against a basket of currencies. The dollar has increased against the euro for the first three days of the year as its domestic picture improves without emphasis on the federal deficit. The plight of state and local finances is altogether another matter for the dollar.

Euro – The single European currency just traded below $1.3175 for the first time in a week as investors turn to the appeal of the dollar. The euro was under pressure from the get-go and fell as fears resurfaced over governments’ ability to raise funds during the year. Portugal was tested the waters midweek issuing six-month paper and while about the same number of buyers emerged compared to the last issue on September 1 of last year, the yield has by now risen from 2.04% to 3.69%. Just as a reminder of the growing dichotomy within the Eurozone, data today showed a worsening in consumer confidence to a 21-month low while an economic climate indicator also declined. Meanwhile a Eurozone-wide PMI services survey indicated an increase in the pace of expansion during the month of December, while an index blending manufacturing and services also increased to 55.5. In Tuesday’s session the euro rose to buy $1.3433 contrasting to a Wednesday low (so far) at $1.3167.

Japanese yen – The yen slumped to a near-two-week low against the dollar following the ADP report. The dollar this morning buys ¥83.07 supported by the glowing employment reading and hopes that data this morning for the ISM services report will provide the strongest reading since May 2006. The yen eased against the euro to ¥109.25.

British pound – A surprise contraction in the PMI construction survey index rocked the British pound earlier in the day before buyers stepped in recognizing that the data likely reflected weather-related disruptions. The response was a one-cent rally to $1.5627 before the pound came in for a real battle with the dollar after the bullish ADP report forcing the pound to a new session low where it last traded at $1.55500.

Aussie dollar – The poor old Aussie dollar has been slammed since commodity bulls were unfortunate enough to position for outperformance of growth-sensitive currencies before checking the weather. The worst floods in decades hit Queensland affecting an area the size of France and Germany forcing evacuations and chaos. The state is the nation’s largest coal producing area and overall accounts for 20% of national output. Disruption to mining activity has caused BHP Billiton and Rio Tinto to declare force majeures allowing them to legally miss contracted deliveries. The economy will undoubtedly suffer as a result and attempts to recover will likely be riddled with difficulties once the waters subside. The Reserve Bank will try to collate enough information to put together preliminary findings. It can’t be long before investors raise the prospect of an emergency interest rate cut to help address the crisis. The Aussie fell back beneath parity with the dollar and trades on its session lows at 99.69 U.S. cents.

Canadian dollar – The Canadian unit is understandably benefitting from the rejuvenation in the greenback and has broken above par once again this morning. The loonie is gaining despite a slide in commodity prices that dragged prices down by the most in seven weeks. As noted above, the move into the dollar is not a risk aversion play but instead is a growth play based upon accelerating prospects for Canada’s biggest trading partner. As they say, what’s good for the goose is good for the gander. The unit rose to $1.0028 following the ADP report.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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