July 3, 2008 Happy 4th of July!
The United States declared independence in 1776, which means that this year we are celebrating our 232nd year of independence!
See you on Monday!
For more details on July 4, click here for Wikipedia
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July 3, 2008 The jobs number for the month of June was bad but not bad enough to stifle the gains in the US dollar. Non-farm payrolls fell by 62k, the sixth consecutive decline in a row. The April number also was revised down from -49k to -62k while the unemployment rate remained at 5.5%, matching the highest level since October 2004.
Anything short of 100k would have been dollar positive and that is exactly how the market reacted today. The biggest contributors were healthcare, education, leisure and government. The biggest losers were in goods producing and business services.
The importance of the NFP number depends upon how it impacts the Fed’s monetary policy decisions and today’s drop in jobs will not hold them back from raising interest rates in the third or fourth quarter. But the Fed needs to be very careful because jobless claims this week broke the 400k level. They came in at 404k this week, just shy of the 3/28 levels, which was the highest in 2.5 years. The labor market will get worst, but probably not as quickly as inflationary conditions, which is why the Fed will barely bat an eye at today’s NFP numbers.
As for the ECB, so far, Trichet is moderate. After raising interest rates by 25bp this morning, he continues to harp on the risk of further upside inflationary pressures but at the same time he remains concerned about growth. Further rate hikes seems to be on the tip of his tongue, but Trichet does not want to spook the markets right now which is why he is simply leaving the door open for another rate hike this year. This is of course a disappointment to Euro bulls especially since Trichet said that he has “no bias.”
The Euro has weakened against the US dollar post NFP and ECB, but the knee jerk sell-off may be a tad overdone. Euro weakness should be limited because the market still expects 3 rate hikes from the ECB over the next 12 months.
Posted in ecb rate hike, non-farm payrolls, ECB, US Dollar
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July 2, 2008 Non-farm payrolls for the month of June are due for release this Thursday, but with the Federal Reserve no longer looking to cut interest rates, will the degree of payroll growth actually have meaningful impact on the US dollar?
Here is the NFP Preview that I wrote for DailyFX.com
The NFP number is being released at the exact same time that ECB President Trichet begins his press conference (3 Potential Outcomes to the ECB Meeting), which means that we could see unusual volatility tomorrow morning. The ECB press conference and the NFP report will either neutralize each other or be a toxic combination for the US dollar.
How to trade the Non-Farm Payrolls Release
Non-farm payrolls are being released early this month because of the Independence Day holiday in the US and for that same reason, trading could grind to a halt after 12 noon as US traders take off for the long weekend.
Trading the NFPs is usually very difficult given the inherent volatility of the currency pair but given the 2 big event risks tomorrow – the ECB rate decision and the NFP release, the US dollar could behave very differently against the Japanese Yen and the Euro. USD/JPY will be the best currency to trade the NFP because it will not be diluted by the comments from the ECB. The currency pair has actually been consolidating for the past 3 trading days and is itching for a breakout. The EUR/USD on the other hand could have a knee jerk reaction to the NFP report and then a sharp reversal as traders tune into Trichet’s comments. Don’t be surprised by 100 pip candles in both directions. The press conference begins at 8:30am ET, but by the time Trichet starts talking, it is usually 8:40 to 8:45am.
The market currently expects a bad number, so a negative non-farm payrolls report will not be enough of a surprise. The current forecast calls for 60k jobs to be shaved off US payrolls. If payrolls come any where near -90k, the dollar would collapse against the Euro as the market questions the viability of a 2008 rate hike by the Federal Reserve. If payrolls on the other hand are better than -40k, it suggests that the labor market is bad but not as bad as everyone may have feared, which would be dollar positive.
Also keep an eye on the ECB interest rate decision and the press conference. If Trichet proves to more hawkish by hinting that they have to raise interest rates by more than 25bp this year, then the dollar could fall against the Euro even if NFPs drop by less than expected. If Trichet is noncommittal about future rate hikes beyond, the Euro could suffer.
Non-Farm Payrolls Could Fall by 100k?
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July 2, 2008 The Euro is rallying ahead of Thursday’s ECB monetary policy meeting telling us that the market expects ECB President Trichet to say something hawkish. A 25bp rate hike has already been discounted by currency traders, but with the annualized pace of Eurozone producer prices growing by the fastest pace on record, consumer spending in Germany doubling expectations and the German unemployment rate falling to a 14 year low, the ECB may have to reconsider their plans to raise interest rates by only 25bp this year.
The ECB is a central bank that hates surprises and because of that, they always like to prepare the markets weeks if not months in advance of any pending move. That is why they have been telling us that a 25bp rate hike, which wouold be their since 2007 is the appropriate expectation for the upcoming monetary policy meeting. They have also been warning that they are not planning a series of rate hikes. However the ECB may have to backtrack on these words given the recent economic reports.
There are 3 possible scenarios for the upcoming interest rate decision that my Currency Analyst Terri Belkas outlined at DailyFX.com.
The most likely is scenario 2 where Trichet hikes by 25 and then signals that additional rate hikes could come. But I would not completely rule out the possibility of a 50bp rate hike.
Scenario 1: +25bps to 4.25%, Trichet Suggest It’s A One-And-Done Deal
While the EUR/USD is likely to jump on the 7:45 EDT announcement of a 25 basis point rate hike to 4.25 percent, any sort of rally will immediately reverse if Mr. Trichet suggests in his post-meeting press conference at 8:30 EDT that the bank has no intention of increasing rates further. This is the most probable scenario, and traders should watch for comments that indicate that downside risks to growth may help to offset upside inflation risks, or notes that “the current monetary policy stance will contribute to achieving our objective” of price stability.
Scenario 2: +25bps to 4.25%, Trichet Signals Additional Hikes
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Posted in ecb rate hike, euro record high, Trichet, euro, ECB
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July 2, 2008 
Here is the “In the Financial Papers Radio Broadcast” (Length: 5:11 minutes). The player should load automatically. Please let me know if you like it. Contact Kathy
In the Financial Papers:
Podcast Covers:
Europe Producer-Price Inflation Accelerates to Record
Overdue U.S. Home-Equity Credit Lines Climb the Most Since 1987, ABA Says
Job Losses in U.S. Increased 47% in June on Finance Cuts, Challenger Says
ADP Employment Report Weaker than Expected
Starbucks to layoff 12,000 people
Australian retail sales rose in May at the fastest pace in six months, sending the currency higher on speculation the central bank will boost borrowing costs again this year.
Central Banks May Disrupt Dollar’s Calm
ISM Manufacturing Number
Europe’s Recession Fears Intensify
Moody’s to investigate staff over ratings bug
France Tries to Take Away’s ECB Independence
IMF Warns of Threat to Poorer Nations
Inflation Accelerates Despite Signs of Slowing Growth
Posted in forex blog, Kathy Lien, non-farm payrolls, Forex Podcast, FX Radio
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July 1, 2008 We are back to the drawing board with the US dollar. Strong consumer spending and the lowest unemployment rate in 14 years could force the ECB to backtrack on their words and actually prepare the market up for more than one rate hike in the third quarter. The June consumer price index is expected to be at 4% double the ECB’s 2% inflation forecast.
Up until now the ECB has openly hinted that a rate hike in July will one-off, but with inflation pressures continuing to increase and growth resilient, 2 rate hikes from the ECB this year is more than realistic.
Other than raising rates by 25bp and moving to a neutral stance, which the market has already discounted, there are 2 other options that Trichet may be considering. One would be to gain the upper hand on inflation by hiking rates by 50bp instead of 25. The second would be to raise rates by 25bp and leave the door open for another rate hike this year. Closing the door completely could be mistake especially as oil prices heads towards $150 a barrel.
As for the US dollar, we are back to the drawing board. The greenback is declining against the Japanese Yen, Euro and British pound. Fears of trouble in banking sector including a profit warning from UBS and talk of a bargain basement sale of Lehman Brothers has stocks set to open lower. The greater the decline in stocks, the lower the chance of a rate hike by the Federal Reserve in the third quarter and the bigger the reason sell the US dollar ahead of the ECB meeting.
Posted in ecb rate hike, euro rate hike, euro, ECB, US Dollar
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