The U.S. non-farm payrolls report has lived up to its reputation of being the most volatility inducing economic release for the foreign exchange market. To everyone’s disappointment, U.S. corporations cut 85k jobs in the month December after adding 4k jobs the previous month. Considering that investors were looking for a stronger report, the large degree of job losses sent the U.S. dollar tumbling against all the major currencies. However the initial sell-off in the dollar did not last long as the greenback recovered nearly all of its post payroll losses within the next hour and a half. Yet as bulls and bears battle it out, fundamentals eventually won with the dollar resuming its downtrend to end the day lower against all of the major currencies.
Payrolls Dash Hope for Speedy Recovery
The sell-off in the U.S. dollar, drop in bond yields and rally in U.S. stocks tell us one thing – which is that the key takeaway from today’s payroll report is the Federal Reserve won’t be raising interest rates anytime soon. Normally continued job losses would be negative for U.S. equities, but knowing that the labor market is still stronger than it was this time last year investors were simply relieved that the Fed has fewer reasons to tighten monetary policy. Overall, traders were sorely disappointed by the NFP release even though there was positive job growth in November. In an environment where 4.8 million people are claiming unemployment benefits, 4,000 new jobs hardly reflects a turnaround in the labor market, particularly if it is followed by 85k job losses in December. The unemployment rate remained unchanged at 10 percent but the 590k decline in household employment indicates that it would have been higher if not for workers dropping out of the labor force. In addition to the weak employment report, consumer credit also fell by a record $17.5B in November as banks reduce lending and consumers cut borrowing.
Positioning Into the Big Week Ahead
Expect more volatility in the U.S. dollar in the week ahead with the trade balance, Federal Reserve Beige Book report, retail sales consumer prices, Empire State Manufacturing Survey, industrial production and consumer confidence numbers due for release. Part of the reason why the dollar did not see a larger decline may be due to the fact that consumer spending is expected to be strong following the solid ICSC and Redbook chain store sales reports. Higher oil prices could also prop up inflationary pressures while the improvements in the labor market could bolster consumer confidence. Meanwhile as of this past Tuesday, futures traders increased their short EUR/USD, GBP/USD and long USD/JPY positions. It is likely that they have pared those positions following today’s NFP report. However, despite the resilience of the dollar earlier this week, futures traders increased their long AUD/USD and short USD/CAD positions. This suggests that if the dollar continues to sell off in the coming week, the EUR/USD could see steeper gains than the AUD/USD.
What the First 5 Days of the Trading Year Tell Us
Finally, there is an old saying that how stocks perform in the first 5 trading days of the year will determine how it trades for the entire year. If that is true, then 2010 should be a good year for U.S. equities since stocks hit fresh 15 month highs today. If the relationship between currencies and equities is sustained, then higher stock values should help to bolster risk appetite, which would be positive for high yielding currencies and negative for low yield funding currencies like the Japanese Yen.
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