Truly Ugly

IB FX Brief

Friday September 2, 2011

Few words can describe the August payroll reading of “no-change” – but the few that I can think of are: Truly ugly. The dollar staged a tentative advance on the lack of hiring as investors probably quite rightly concluded that the stage is set for a further bout of quantitative easing. The difference this time around when the September FOMC meeting takes place is that Mr. Bernanke will have some hawks to tame when it comes time to put detail to the plan. Expect the Fed to shake its balance sheet and move along the curve in an effort to sprinkle a shower of lower interest rates to borrowers who would benefit from it. The plausibility of a “twist” in the Fed’s balance sheet would pacify those hawks should Bernanke manage to maintain the outright size of what it owns. That’s a significant dollar positive and explains in part why dealers favor the greenback in conjunction with a run on risk.      

U.S. Dollar – The net amount of additional hiring by employers during August was zero. The July picture changed for the worse. Government shed 17,000 workers. Private employment languished with the least number of gains since a dip in February 2010. And after a slew of sentiment indicators depicting a loss of confidence amongst factory owners, manufacturers shed a net 3,000 workers. For sure the information industry was impacted by a 45,000 headcount reduction on account of the Verizon labor dispute but there is little in Friday’s report that instills confidence that the economy is heading towards a better place. Investors who recently bought stocks have done so on account of expected further quantitative easing and today’s report vindicates such anticipation. But in the cold light of day it’s hardly surprising that the stock market is indicated to come in sharply lower. The dollar index, however, has curtailed deeper losses and stands at 74.41. Part of the reason the dollar remains down is heavier losses fared against better-placed risk units of Switzerland and Japan, where the greenback is also weaker.

Euro – The euro fell sharply on the U.S. employment shocker only to rally back in to the black for a brief while. The unit currently buys $1.4261 and felt the weight of added pressure surrounding sovereign debt fears after Greek two-year yields neared 50% adding 4% during the session to a euro-era high. Fears that the crises will spread are hindering the single currency once again. Earlier in the day the euro touched a two-week low at $1.4209.
 
Japanese yen – Risk-off buying of the yen drove the unit skyrocketing versus the dollar to reach ¥76.47 following the abysmal U.S. data. The yen also strengthened sharply against the ailing euro to ¥109.19.

British pound – The pound remarkably found favor as a euro-alternative destination as the single currency was whacked on all fronts. The British economy has weakened notably during the most recent data round as consumer and business confidence continues to suffer at the hands of a fiscally austere government. But with the surging Swiss franc and troubled single currency, the pound keeps finding a bid. Against the dollar the pound was recently quoted higher at $1.6231 while the euro today buys 87.76 pence.

Aussie dollar –The Aussie slid in immediate response to the U.S. jobs number before gaining on increased hopes for a Federal Reserve solution through additional easing measures. The unit slumped to $1.0679 before bucking up to almost unchanged at $1.0711 U.S. cents.

Canadian dollar – The message of a weaker export market for Canada’s number one marketplace couldn’t have been clearer causing a slide in the value of the Canadian dollar. The unit fell to as low as $1.0177 cents as risk appetite was tripped up by a flat U.S. employment reading before the Canadian stabilized at $1.0206 cents.

Andrew Wilkinson                                                                   
Senior Market Analyst                                                               ibanalyst@interactivebrokers.com