Ahead of Friday’s U.S. employment report traders have itchy fingers with few daring to fire meaningful shots. Tension was elevated following an ADP report showing private employers possibly tugged sharply on the reins during May, hiring fewer workers. The official data remains likely to show net job growth, although economists will likely be forced to conclude that even $2.3 trillion in quantitative easing has been insufficient to bring order back to the labor market by anywhere near as much as the Federal reserve would like. It will, however, take a huge outlier of a number to prevent a flood of financial media articles over the weekend that scrutinizes the history, intention and outlook for quantitative easing. Set your Google alert for QE3 over the weekend and watch the barometer spike. In the meantime, the yen seems to be foreboding further economic troubles ahead.
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Japanese yen – Beleaguered by domestic political woes stemming from the catastrophic March earthquake events the yen is once again flourishing as a safe haven. Dealers are casting off the shackles of intervention, which they fear far less today as the time distance widens beyond the nuclear power-plant trauma. A rising yen today is symptomatic of global growth concerns rather than specific to Japan’s near meltdown meaning that the G7 would be far less likely to join forces to stymie the advancing yen. The Bank of Japan would rather understand that it would be forced to act unilaterally. The yen rallied overnight against all 16 major currency units and reached its highest versus the dollar in six weeks at ¥80.52 according to Interactive Brokers data. The weakening in the U.S. labor market and on onslaught of discussion surrounding what the Fed might do beyond the completion this month of QE2 has set the yen up once again as a safe haven with investors realizing that monetary tightening in the U.S. remains as distant a speck on the horizon as it does in Japan.
U.S. Dollar – The dollar index reached its lowest point ahead of the key labor market report since May 6. U.S. private employers likely added 173,000 new positions during May while the forecast consensus for the headline reading is for job creation of 165,000 following 244,000 during April. But even the reality of a possible dip to 8.9% in the overall unemployment rate has investors concluding that the recovery is not only limp, but is losing steam especially in light of the final days of the Fed’s asset purchase program. The Fed remains caught in a rocky place. Their aim of fighting deflation through depressing market yields appears successful when data points rise propelling equity and commodity prices skywards. The apparent success transmits to fears over inflation and therefore rising yields. But when the chips are down with the economy hitting a soft patch, investors perform the job of the Fed and buy bonds driving yields lower, but leaving the impression that policy isn’t working.