Dean’s FX 9th June|Help the USD$!

The USD$ is mixed in the O/N trading session. Currently it is higher against 8 of the 16 most actively traded currencies in another ‘subdued’ trading range after the end of last week’s dollar meltdown.

FX Heatmap June 9th, 2008

No big surprise, employment data from the US remained consistent on Friday. The US lost jobs for a 5th consecutive month last month, combined with an eye popping jump in the unemployment rate (the largest in two decades) signaling that the world’s largest economy is stalling. Payrolls fell by -49k after a -28k drop in April. The unemployment rate is the obvious show stopper, with a +0.5% monthly increase to 5.5%, the largest since Feb. 1986. The market had been waiting for the unemployment/household survey data to catch-up to what has been happening in the real economy. The rise was produced by the combination of a huge +577k rise in the labor force and -285k decline in household survey jobs. The data solidifies the theme of a ‘weak but not collapsing’ economy. Digging deeper one notices that the weakness is broad-based by sector, with the ‘usual suspects’ construction (-34k), manufacturing (-26k), and retail (-27k) continuing their pattern of declines. Hourly earnings advanced a trend-like +0.3% on the month (+3.5% y/y). Real incomes remain awful (-0.4% y/y), emphasizing that the recent tax rebates might only carry retail demand for a few months. Disposable income and spending power continues to be eroded. As to be expected the greenback suffered a dramatic whiplash from Bernankes supporting comments early last week. In hindsight, where would the USD$ be without Cbanks hawkish rhetoric in favor of the currency. On Friday it managed to have it worse run in two months as the perfect storm scenario betted against her. Combining the potential threat of the ECB to hike rates, an astounding jump in the US unemployment rate (5.5%), resulted in frenzied ‘speculation’ buying of commodities by investors could once again bring the USD$ to its knees.

The US $ currently is lower against the EUR +0.18%, GBP +0.33% and higher against CHF -0.08% and JPY -0.55%. The commodity currencies are mixed this morning, CAD -0.19% and AUD +0.14%. Canadian employment data on Friday arrived just below consensus (+8.4k vs. +10k); the gain was the smallest so far this year. The trend in employment has slowed with the slowing in the economy. The 3- month moving average in May (+14k) was the lowest since Sep 2006. Digging deeper, one notice that hours worked also were down for the 2nd Q, (to date the average is 1.4%-the weakest since 3rd Q2003, suggesting that GDP growth (or lack of it) should remain weak in 2nd Q after declining -0.3% in 1st Q. Average hourly earnings picked up to +4.8%, y/y, but, do not expect to last with higher unemployment. The unemployment rate (6.1%) matched the highest in about a year, and the below-trend economic growth could lead to further increases in the rate in coming months (similar to the US number on Friday). Despite Oils prices maintaining their ‘rabid’ pace, the loonie has temporarily de-coupled its self from the usually strong correlation. This is in anticipation of the BOC rate decision tomorrow. With a slowing economy, the market anticipates another 25bp cut by Governor Carney (2.75%). The Canadian economy with its association and proximity to the US by default can only come under more pressure over the next Q. Week over week in Ontario; further job losses continue to grab the headlines. Expect traders to look for better levels to sell the currency. Economic data remains robust ‘down under’ with growth numbers being twice as strong as anticipated. This has investors believing that the RBA will eventually hike again (7.25%), combine this with robust commodity prices, expect traders looking to buy the AUD$ on pull back for now (0.9613).

Crude is lower O/N ($135.00 down -310c). Records are there to be broken and commodity prices are doing this weekly. OPEC, G8, G7 finger pointing will be the order of the day, as CBankers will blame others for the spiraling prices of late. Subsidizes, supply issues and geo-political concerns have all been blamed in the not to distant past. But, it’s the greed factor by investors that may push the world economy into a global recession. Oil is being used as a hedge by speculative buyers for the weakened USD$. Prices will continue to go up as investors seek alternatives. Economies are quickly feeling the pinch, in North America we are entering the ‘annual driving season’ and temperatures are starting to soar across the country. In the short term that does not bode well for any price pull backs. Last week the EIA report reveled larger than expected US fuel supply gains. Gas stocks rose +2.94m barrels to 209.1m last week, while inventories of distillate fuel (includes heating oil and diesel), rose +2.28m barrels to 111.7 million. But, fuel demand continues to remain down y/y. Refineries are making fuel, but no one wants to buy it. Fuel consumption is averaging +20.4m barrels a day over the past month that is down -1.1%, y/y. Clearly consumers are responding to higher prices. For instance the airline industry is aggressively paring back routes and eliminating jobs to cope with higher prices. Gold like oil surged on Friday ($907) as investors desired the yellow metal as an alternative investment to an ailing greenback.

The Nikkei closed at 14,181 down -308. The DAX index in Europe was at 6,800 down -3; the FTSE (UK) currently is 5,904 down -2. The early call for the open of key US indices is higher. Yields of the US 10-year bond eased 11bp on Friday (3.92%). Treasuries aggressively rallied to their largest daily gain in 4 months after government reports showed that the US unemployment jumped by 5/10’s last month to 5.5% (the most in more than two decades) and the economy lost jobs for a 5th straight month. With Oil prices surging, investors are concerned about a deeper recession and continue to seek the sanctuary of the FI asset class.

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell