The Euro is holding above 1.4800 so far during the American session against Greenback. EUR/USD is recovering after falling to 1.4754 reaching the lowest price in a month. The pair found resistance at 1.4840 and pulled back to 1.4810. Currently trades at 1.4820/25, 0.23% below today’s opening price.
On the upside the Euro could find resistance at 1.4840/50 and above at 1.4900/10 and 1.4965/80. On the downside, below 1.4755, next support levels lie at 1.4730/40 and below here, 1.4700 (Nov 4 low) and 1.4680 (Nov 2 low).
The Wells Fargo Research Team comments: “The increased scrutiny of Federal Reserve policy could explain the concurrent gain in the dollar and dip in equity market. In any event, our view remains that the greenback remains close to a medium-term low, and we expect dollar gains against the G10 currencies in 2010.”
Non-farm payrolls blew away even the best estimates by economists, driving the dollar sharply higher against all of the major currencies. No one including ourselves expected such a hot number. We have previous said that in order for the dollar to stage a long term recovery, U.S. growth needs to blow away expectations and the latest NFP numbers did just that. With job losses falling by only 11k last month, the U.S. economy is at the verge of returning to positive job growth. Based upon the consumer confidence numbers, the ADP report and the employment component of the ISM reports, it is hard to believe the accuracy of the latest non-farm payrolls figures. However the numbers provided are the only numbers that we have at hand and revisions will not be released until next month. Therefore taking the report at face value, the massive improvement in the labor market should create a medium term bottom in the U.S. dollar as long as risk appetite does not gain control of the currency market.
The latest non-farm payrolls figures suggests that the U.S. economy is not doing nearly as bad as everyone have feared. Many had assumed that the sheer magnitude of the recession would require a more disenchanting path of unemployment, signs that it is subsiding could indicate that the recovery will be more brisk and robust than previously thought. The drop in the unemployment rate from 10.2 to 10.0 percent suggests that joblessness may have finally peaked and the price action in the dollar reflects traders repositioning for stronger U.S. growth in 2010. Given that the Fed has never raised interest rates before a peak in the unemployment rate, the decline in November gives the Fed a stronger reason to speed up their timetable for an exit. The average weekly hours and wage data indicate that companies are forcing employees to work longer hours for an incrementally smaller increase in pay but this is not enough to erase the positive tone of the data. In our non-farm payrolls preview, we talked abuot how it typically takes an average of 2.27 months for job growth to return after a recession. Even though the official end of the recession is still debatable, if we use Bernanke’s estimates of a September estimate as a rough guide, then the U.S. economy is on track to return to positive job growth in December.
However, with the good news and excitement aside, the next question that comes to our minds is what this means for the Federal Reserve and its doctrine of keeping rates low for an extended time. Up until this point, no respectable economist would consider that rates would move anywhere until the second quarter at the earliest. In fact, the Fed has committed to little in terms of unwinding extraordinary measures, having only terminated the Treasury purchases in October. However, if a continued easing in unemployment indicates that we have indeed past the peak, history has shown that the Fed is inclined to start raising rates. Typically, the trough in employment is used as a barometer of when the Fed feels comfortable with draining excess money from the system. It remains to be seen how the Fed will react and a hike still seems months in the future, but today’s release definitely brings new possibilities to the table.
It will be another busy week in the forex market with 4 central banks delivering monetary policy announcements. Although the strength of Friday’s non-farm payrolls report should help the U.S. dollar hold onto its gains, the lack of U.S. economic data in the beginning of the week turns the market’s focus to the monetary policy outlooks of Canada, New Zealand, Switzerland and the U.K. The degree of hawkishness or dovishness of these central banks will determine how these currencies perform against the U.S. dollar and other currencies. Here is our outlook for each of the upcoming monetary policy announcements:
1) BANK OF CANADA – POTENTIAL FOR HAWKISH COMMENTS (Tuesday December 8th, 9:00 EST or 14:00 GMT)
The Bank of Canada will be the first to make a monetary policy announcement on Tuesday. Given the improvement in the Canadian economy, there is a good chance that the central bank will adopt a hawkish tone and talk about implementing an exit strategy. The latest labor market numbers from Canada, which reported job growth of 79k, 5 times greater than expectations adds to the string of gradually improving economic data stemming primarily from the automobile sector. Retail Sales have also been strong, annualized Gross Domestic Product surged from -3.40% to 0.4% in the third quarter while inflation rose for the first time in five months. While we might be tempted to call for the Bank of Canada to start tightening as a result, the odds show that the bank is settled and will not budge for some time. From the most recent monetary meeting on October 20th , the bank notes that they have reaffirmed their commitment “to maintain its target for the overnight rate at its currency level of 0.25 percent until the end of the second quarter of 2010”. However before raising interest rates, the central bank will first need to unwind some of their emergency measures and we believe that they could telegraph their plans to start doing so at this week’s monetary meeting, which would be bullish for the Canadian dollar. The only thing that would hold the central bank from doing so is the recent strength of the Canadian dollar but it is currently trading 3 cents off its lows. In the last monetary policy statement, the Bank of Canada indicated that the persistent strength in the loonie was becoming a “drag” on growth and is putting additional pressure on inflation. However, it is questionable as to how long Carney will be able to stall with the economy clearly gaining traction.
2) RESERVE BANK OF NEW ZEALAND – SET TO REPEAT PLANS TO KEEP RATES UNCHANGED UNTIL MID 2010
(Wednesday December 9th, 3:00pm EST or 20:00 GMT)
Of all the central banks reporting this week, the Reserve Bank of New Zealand has probably been the most direct in its preference to keep rates unchanged until the second half of 2010. Therefore, it is almost set in stone that the RBNZ will keep things steady next week which could be bearish for the currency because their dovishness comes contrast to the stronger U.S. employment report. According to central bank governor Alan Bollard, there is just no urgency to take rates higher at this point. The RBNZ is being held back by two factors; the consistent strength in the kiwi and economic data that has not necessarily wooed traders. Bollard has commented several times about the strength in the kiwi, noting that current account deficits are suffering as a result. The RBNZ will not want to risk pushing up the currency through any unnecessarily hawkish comments considering that economic data has been relatively lackluster. Bollard recently pointed out that the New Zealand recovery will be “slower and more vulnerable” than in neighboring Australia. Producer Prices sank severely in the third quarter into negative territory, raising the risk of inflation. Retail Sales completely missed the mark, increasing by only 0.2% after rising 1.10% the previous month. The list just keeps going, with unemployment skyrocketing and an expanding trade deficit. Furthermore, the bank is under pressure from both the Organization for Economic Cooperating and Development and New Zealand’s own Institute of Economic Research to keep the target rate pegged at the 2.5% mark and that is exactly what we expect from the central bank.
3) SWISS NATIONAL BANK – SOFT WARNINGS ABOUT FRANC STRENGTH
(Thursday December 10th, 3:30 EST or 8:30 GMT)
The last time that the Swiss National Bank held a monetary policy meeting was back in September. Even though central bank officials have noted improvements in their economy since then, their constant battles to keep the Swiss franc from strengthening may prevent any action on the monetary front. If they point to the franc specifically, the currency could sink on a renewed possibility of intervention but given the recent appreciation of EUR/CHF and USD/CHF, we don’t except the SNB to grow more concerned about their currency. Swiss National Bank President, Jean Pierre Roth, recently made remarks that indicated that he might ‘soon’ consider withdrawing extraordinary stimulus measures. These comments set the stage for the upcoming rate decision as the market will be looking for an exit schedule. At the last meeting monetary policy meeting, the central bank upgraded inflation estimates, but the recent fall off in Consumer Prices contradicts the central bank’s forecast. Similarly, even though growth improved over the prior quarter, it is still in negative territory, lagging many Group of Twenty countries. Therefore, on a fundamental basis, the SNB may not be quite ready to make any rash decision. Also we fully expect the SNB to repeat their threat to “act decisively to prevent any strengthening in the Swiss Franc against the euro” which should be bearish for the currency.
4) BANK OF ENGLAND – NO CHANGE TO QUANTITATIVE EASING
(Thursday December 10th, 7:00 EST or 12:00 GMT)
One of the most anticipated monetary policy announcements this week will be from the Bank of England on Thursday. After raising their Quantitative Easing program last month, we expect the central bank to remain on hold as they usually prefer to wait until the Quarterly Inflation Report is prepared (in February) to telegraph their monetary policy plans. According to BoE member Andrew Sentence, this gives the bank “a lot more evidence” to make a decision. Although the Bank of England remains one of the most dovish central banks, their last decision did not express the usual magnitude of their easing bias, suggesting that the next step for the bank may be to keep things on hold. On November 5th , BoE policy makers voted to keep the target rate at 0.5% and increase the quantitative easing program by £25 billion. Even though on a comparative basis, the BoE looks to be clearly behind the pack, this was less than the £50 billion expansion expected by economists. Nevertheless, continued easing of any sorts gives the impression that one of the oldest central banks in the world still has doubts about the viability of their economic recovery. The minutes that followed showed that the vote was split three ways, with one member pushing to keep the program unchanged and another dissenting to expand by £40 billion. It is important to note that, even the extreme opinion presented at the meeting, did not meet market estimates. While this might give the impression that November was their last ditch effort to boost the effectiveness of asset purchases, recent comments indicate otherwise. The Bank of England’s Governor, Mervyn King, noted that he has an “open mind” when considering further easing in coming meetings. Furthermore, King’s assertion that the “depreciation in the sterling should lead to recovery” may keep policy on the easy side. As for the upcoming gathering on December 10th , expectations are confounded by very mixed economic data. For one, Consumer Prices were stronger across the board, but Manufacturing PMI and Gfk Consumer Confidence weakened. Furthermore, revised GDP may have been better than previous estimates, but still showed a modest contraction.
After Friday massive dollar rally in the wake of a surprisingly strong NFP numbers , major pairs are consolidating their losses as the new week of trading begins. The pound, however, remains on the back foot after an article in a British daily suggests that the UK economy may slip from its top 10 ranking as early as 2015.
Writing in the UK Independent, Sean O’Grady notes, “Britain seems doomed to be relegated from the "premier league" of international economies over the next few years - with serious implications for its diplomatic status and international "clout". Stagnation at home and rapid economic growth in developing economies will push the UK as low as 11th in the global pecking order by 2015, according to analysis by the Centre for Economics and Business Research (CEBR).
Having clawed up to fourth place by the start of this decade, the recession has already seen Britain overtaken by China, Italy and France, and it seems likely that the slide will get worse.”
Although Mr. O’Grady concentrates mainly on the loss of political; and diplomatic power that could occur, the currency markets tonight are far more concerned with the negative economic implications and the concomitant loss to the pound that this scenario would bring. We’ve recently argued that GBP/USD would likely suffer the most in any counter trend dollar rally, as the financially dependent UK economy remains vulnerable to further credit problems in Dubai as well as any serious correction in global capital markets. Today’s story in the Independent only confirms the structural problems facing pound longs.
Cable has been remarkably resilient despite the growing chorus of worries and eco data last week was mixed but not materially negative. However, this week sterling could come under further stress if the Industrial and Manufacturing Production reports as well as the Trade Balance numbers disappoint. The pair has held long term support at the 1.6400 figure for the past six weeks. If that level is broken with force 1.6000 GBP/USD could come into view as doubt about UK economic performance begin to grow.
