special reports

Talking Points

$ Jobs Drown the Dollar
€ ECB Hikes As Expected
¥ Yen Lags the Field
₤ Unexpected Rate Hike Propels Pound
₣ Slowing CPI Doesn’t Stop the Swissie

Jobs Drown the Dollar 

EUR/USD marked time for most of the week as traders awaited the crucial  NFP release on Friday. The consensus going into the number was 143K but payrolls increased by only 113K pushing the EUR/USD above the 1.2860 resistance level. In retrospect the miss was not surprising. As we noted, “The key concern of the market is that the slowdown in the housing sector  which has been responsible for as much as 40% of allUS job generation over the past four years may be finally starting to have very adverse effects on the overall US employment market.” Although non-residential construction payrolls actually gained 9K, the much broader part of the housing sector including mortgage brokers. real estate agents, home inspectors clearly produced little new jobs in the wake of contracting home sales and if rates go higher the contraction in housing could lead to additional problems in job creation.

Meanwhile Paul Kasriel of Northern Trust looked at the weekly initial jobless claims data on a year-over-year percent change basis -- thus eliminating noise and bias and discovered the following results, “Back in 2004, initial jobless claims were falling around 20% year-over-year. Currently, initial jobless claims are, for all intents and purposes, where they were a year ago. We conclude from this, therefore, that the demand for labor, while still growing, is growing at a much slower pace than it had in recent years.” That in turn leads Mr. Kasriel to predict that the Fed will pause at next  Tuesday’s FOMC meeting. If that is indeed the case, the greenback may see further downside as its primary support – the ever  rising interest rate yield versus other majors will now begin to erode.

ECB Hikes As Expected

Euro-zone economic data for the week was relatively tepid with PMI services dropping sharply to 57.9 from 60.1 expected as the positive effects of the June’s World Cup tournament wore off. The labor situation however continued to improve with EZ unemployment rate slipping to 7.8% from 7.9% expected suggesting that the region is making slow but steady progress as the economic recovery continues. The pivotal event for the Euro-zone however was the ECB rate hike announcement on Thursday. As expected, the central bank raised short term rates by 25bp to 3.00% but the more interesting aspect the announcement was the relatively hawkish posture adopted by ECB President Jean Paul Trichet. As we wrote on Friday, “Despite the absence of “vigilance” in his remarks, Mr. Trichet’s general tone in the post announcement conference was decidedly hawkish as he stated that the central bank will continue to progressively remove liquidity if EZ growth proceeds at the current pace. For the typically non-committal Mr. Trichet this statement was tantamount to announcing  that the ECB intends to take rates to 3.5% by year’s end.”

Next week the economic calendar kicks off with Retail PMI data and given the fact that German Retail Sales disappointed by printing -0.4% versus 0.9% expected, the possibility of a downward surprise is strong. The European consumer is still  reluctant to spend, but if the employment picture continues to improve, consumer spending should pick up pace fueling further growth in the recovery. In the meantime the German Trade and Current Account Balances are the only other releases of note next week but none of the European data on the calendar is likely to exert much impact on EUR/USD trade in comparison to Tuesday’s FOMC decision which depending on how it goes, could guide the direction of the pair for the rest of the week.

Yen Lags the Field

The yen continued to lag the other majors rising only 19 basis points against the greenback. Against the pound the yen lost a whopping 451 points for the week as interest rate differentials weighed on the currency. On the economic front the Japanese calendar was relatively quiet with only Industrial Production of interest to traders. The report showed continued growth in the sector rising 1.9% from 1.3% expected. While the news had a minor positive effect on yen trading, market focus soon  turned to speculation of the next rate hike from BOJ. Governor Fukui fanned the flames a bit by stating that “We have not said there won't be any rate hike by the end of this year” but did not provide any specific time frame  offering little concrete guidance  to yen bulls.

Next week the calendar is considerably busier with a number of Consumer and Industrial reports due. We will as usual keep our eye on the Eco Watchers survey. If this release pops back up above the 50 boom/bust level as expected, yen bulls may have something to celebrate as that news would indicate that the Japanese consumer demand remains buoyant and should in turn speed up the BOJ rate hike process. The other key release of note will be the CGPI data due on Wednesday.  If the that number prints at 0.4% or higher it would signal the build up of  inflationary pressures within the Japanese economy and may spur the BOJ to action as well.

In short, yen trading will continue to be dominated by carry trade considerations. If the Fed pauses, the unit may receive and extra boost as specs will start to liquidate the carry. However, if the Fed raises rate to 5.5% the yen will likely continue to get battered even if the US monetary officials hint at a pause down the road. Until such time that the currency market becomes certain that the interest differential between the yen and the high yielders will cease widening the unit will suffer from carry trade selling

Unexpected Rate Hike Propels Pound

As we said last week,” Reaffirming the inflation concerns, economic data out of the UK has been quite positive lately, and with annual CPI well above the BoE’s 2.0% target at 2.5%, it’s no wonder the markets are beginning to price in a rate hike of 25 basis points to 4.75% for the Bank’s MPC meeting next week on August 2-3.”  Apparently, the majority of traders were unprepared for the hike as Cable spiked over 100 points immediately following the announcement, and the currency gained an additional 100+ points to wrap up the week as the highest gaining major vs. the dollar.  The BoE statement justified the rate increase by saying that household spending had recovered while business investment had picked up and exports remained robust.  It went on to say that that inflation is likely to remain above target for some while.  Can we therefore expect further policy tightening before year end?  Money markets are currently pricing in a 30% chance, but this week’s Inflation Report could raise the odds if it takes on a hawkish tone.

Last week’s economic calendar reiterated the strength of the housing market, as Nationwide House Prices rose 0.8% in July, beating expectations of a 0.4% gain and pushing the annual rate even higher to 5.9%.  Additionally, while other lending figures in the UK diminished slightly, Mortgage Approvals managed to reach 120K in June, a solid 5K over the predicted amount.  The recent increase in interest rates may cool the housing market a bit, as rising borrowing costs should inhibit loan growth.  With the exception of Construction PMI, which surprisingly rose to 53.2, PMI figures declined more than anticipated in July, as the Manufacturing Index hit 53.8 and the Services Index fell to 57.9.  The weakening Manufacturing and Services data does not bode well for the economy, as business strength was a factor in the tightening decision noted by the BOE.

The BoE’s release of the Quarterly Inflation Report on Wednesday will be the key event  next week, as it will give more insight into the potential for further monetary policy tightening by the end of the year.  Prior to the release, Industrial and Manufacturing Production could lend relief to Pound bears, as both figures are anticipated to slow in June.  However, expected improvements in Same Store BRC Retail Sales to 3.0%, as well as a predicted narrowing in the Visible Trade Balance to -£6.2B may only serve as an appetizer for Cable bulls looking for a hawkish inflation report.

Slowing CPI Doesn’t Stop the Swissie

The Swiss currency essentially ignored the country’s economic data this week, however, Swissie bulls were the beneficiary of dollar weakness as a result of a disappointing employment picture in the US.  The SVME PMI figure pushed past the expected 63.7 and reached a stellar 65.1 in July.  With this strong manufacturing data, along with the rise in the KOF leading index two weeks ago, domestic growth remains strong. CPI data, however, was not as encouraging, as the July reading fell -0.7% against an expected decline of -0.5%.  The diminishing inflationary figure brings the annual rate down to 1.4%, well below the Swiss National Bank’s target of 2%, and has the potential to slow down the normalization of policy rates.  Prior to the CPI figures, benchmark rates were anticipated to be hiked as high as 2% by year end, but continued broad based growth could allow the SNB to stay on track with policy tightening.

This week’s sprinkling of data should underpin the growth story traders have seen forming in Switzerland, as the seasonally adjusted Unemployment Rate is likely to hold at 3.3%, the lowest level since early 2003.  A strong labor market can be productive in improving consumer sentiment, as should be indicated by the SECO Consumer Climate, which is anticipated to rise to a reading of 12 in July from June’s 7.  The combination of this week’s expected strong results should be enough to provide the Swissie with an additional boost, but the currency will clearly trade off the US Fed’s policy decision and subsequent comments on August 8^th rather than any of its own economic data.

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