U.S. Employment report creates more waves

IB FX View    

Thursday July 2, 2009

The U.S. trading week is ending in completely the opposite fashion to its demure start thanks to yet another resounding number of jobs lost during the month of June. As a result of a payroll report reading 467,000 losses and 100,000 more than anticipated, the recovery theme suffered a dramatic setback. The rate of unemployment rose to 9.5%. Not only is the dollar on a roll, but as a safety haven its partner in crime has reversed and earlier loss against the dollar and is rising strongly.

The European Central Bank left interest rates unchanged at what its president Jean-Claude Trichet called an “appropriate” 1% level. However, he managed to undermine the single euro when he opened the door to a further reduction in the repo rate when he said the door to further cuts was not necessarily closed.

Today’s move has weakened the euro close to $1.40 after riding high yesterday at $1.42 following a Reuters story indicating that the Chinese were tabling a motion to discuss an alternative to the dollar at next week’s G8 meeting. However, the Chinese vice foreign minister told reporters today that he knows of no such plans. So the one-two sucker punch refuting the Reuters report and the risk aversion spurred by today’s unemployment reading have both helped give the dollar a bid into the weekend. We are unsure whether position squaring ahead of the early finish to the U.S. week will exacerbate the move in thin trading conditions.

The bout of dollar and yen strength are a sharp contrast to the moves spurred mid week by news of a strengthening Chinese manufacturing sector. Risk appetite helped knock a hole in the dollar and yen as a result. However, at ¥96.15 versus the dollar, the Japanese unit is retreating from a near ¥97.00 reading earlier this week. And against the euro the yen has reacted strongly by retreating to ¥134.85 from ¥136.70 on Wednesday.

The odd thing about current events is that we keep hearing about the fact that the yen is likely to remain a basket case as investors ditch it in favor of high yield as the global economic environment recovers. The problem is that it isn’t really losing that much ground and now, the data is becoming increasingly ambiguous. Last week domestic Japanese investors spent the largest net amount of yen in four years on buying securities and bonds of foreign nations. But the danger now surely is for a yen rebound as more investors start to question their rationale for maintaining new short yen positions.

The British pound is off a cent and a half versus the dollar at $1.6325 to round off the week while The Swiss franc is marginally stronger against both the euro and dollar at Sfr1.5206 and Sfr1.0855 following further comments from an SNB board member once again underscoring the fact that the Swiss central bank stands ready, willing and able to sell its own currency.

The recent drop in commodities partly due to weaker economic prospects has the price of crude oil lower just fractionally beneath $70 as driving season peaks here in the U.S. Commodity price falls and a stronger dollar have harmed the Aussie and Canadian dollars this morning. The Aussie is off to 79.48 U.S. cents, while the Canadian dollar, which must now await its own jobs report next Friday, is off to 86.12 U.S. cents. The Canadian report is expected to show 30,000 job cuts lifting the unemployment rate to 8.7%.

Andrew Wilkinson                                                                     
Senior Market Analyst                                                               ibanalyst@interactivebrokers.com