On Friday, the Bureau of Labor Statistics is expected to tell us that US employers fired another 500k people in the month of January. Surprisingly enough currencies and equities are trading higher ahead of the non-farm payrolls report which suggests that traders are not afraid of a bad number. Everyone knows that the US economy is very weak and major job losses will continue. Since traders are becoming immune to bad data, it may take job losses in the area of 600k to spook them (January Non-Farm Payrolls Preview) . Instead, traders are looking beyond Friday’s non-farm payrolls report to the Monday, February 9th speech by US Treasury Secretary Timothy Geithner. According to a Treasury official, Geithner is expected to unveil a bank rescue plan next week . This is one of the few things that could strike a meaningful recovery in the currency and equity markets. If traders deem Geithner’s plan as satisfactory, we could see a further recovery in the financial markets despite the fact that the US economy will get worse before it gets better.
Jobless Claims, Factory Orders and Chain Store Sales
This morning’s economic data was mixed with jobless claims skyrocketing but the losses in factory orders and chain store sales moderating. The number of people claiming unemployment benefits for the very first time broke the psychologically hobbling 626k mark, which is consistent with a very weak labor market. It should just a matter of time before the total number of people collecting benefits (continuing claims) hits 5 million, up from its current level of 4.788 million. Non-farm productivity increased while unit labor costs declined. This suggests that the people who still have jobs are working harder for less pay. Chain store sales fell less than expected, but the improvement was due primary to sales at discounters like WalMart. As for factory orders the rebound is off of record lows. Don’t expect any good news from US economic data, the best that we will get are less negative reports.
How to Trade Non-Farm Payrolls
In this current market environment, a weak non-farm payrolls report may not be entirely dollar negative. The currency market’s reaction to the labor market number should primarily revolve around risk appetite. A truly negative number could trigger another fit of panic, sending investors into the safety of US dollars and out of any currency that does not hold ranks as a safe haven. On the heels of a weak number, the only currency that the dollar could lose value against is the Japanese Yen. If payrolls fall by 524k (the number of jobs lost in the month of December) or less, we may see renewed risk appetite that could benefit the Euro, Yen, Australian, Canadian, and New Zealand Dollars. Non-farm payrolls is the most market moving number for the greenback which can make trading NFPs very risky. This is particularly true since revisions can easily exacerbate or offset the headline release. Usually it is best to stand aside, but if you insist on trading the event risk, USD/JPY may have the cleanest reaction to the economic data.
EUR/USD: ECB STILL STUCK IN THEIR OLD WAYS
The Euro was one of the few currencies to lose value against the US dollar today. Following ECB President Trichet’s post monetary policy meeting press conference, the EUR/USD actually traded above 1.2880 before reversing all of its gains to end the day lower. Initially, the EUR/USD rallied because Trichet was reluctant to turn extremely dovish but the currency pair quickly lost ground as Euro traders realize that the central bank is stuck in their old ways which could mean the destruction of the Eurozone. The ECB is in their own world and no one can quite understand why Trichet refuses to give up on his obsession with inflation and finally deliver the monetary stimulus that the Eurozone needs. Thankfully, Trichet did not hide the fact that 2 percent will not be bottom for Eurozone rates . More rate cuts will be delivered and the 50bp easing that the market is looking for is probably the right bet according to Trichet. With that in mind however, Trichet also said that the ECB does not pre-commit or exclude anything. We believe that interest rates could fall as low as 1 percent, because another half point cut is not enough ( Trichet’s Folly ). The economy remains very weak as illustrated by this morning’s German factory orders report. The orders dropped 6.9 percent, which is 150 percent more than the market’s forecast. Ratings agency Moody’s also cut the bank debt guarantee for the Irish government to negative. Ireland is expected to be one of the next countries to face a credit downgrade by rating agencies.
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