by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar consolidated close to 1.47 against the Euro ahead of the payroll data on Friday in cautious trading. Following significantly weaker than expected data, the US currency dipped sharply to lows around 1.4820 before a recovery to 1.4770.
US employment growth for December was held to 18,000 after an upwardly-revised 115,000 in November while unemployment rose sharply to 5.0% from 4.7% as the number of people looking for jobs increased. There were monthly employment falls in the manufacturing, construction and retail sectors with the total payroll increase the lowest for four years.
The ISM index for the services sector was little changed at 53.9 for December with orders and employment indices rising over the month. The ISM data will provide some relief, but the employment data will increase unease over economic trends and will maintain pressure for an aggressive series of interest rate cuts by the Federal Reserve.
The latest ECRI inflation index also dipped to a three-year low for December. Futures markets put the possibility of a 0.50% cut at the end of January at over 50% following the payroll data. The dollar will, therefore, remain vulnerable on yield grounds, although a substantial amount of easing has now been priced in.
The Euro-zone PMI index for services edged weaker to 53.1 in December from a provisional 53.2 with the Italian index below the 50.0 level. Euro-zone inflation remained at 3.1% for December and the ECB will, therefore, remain on inflation alert, but policy decisions will become increasingly complex for the bank.
The yen consolidated above the 109.0 level in Asian trading on Friday. Japanese markets opened following the series of holidays and the degree of risk aversion was illustrated by a drop in the Nikkei index of over 4.0% to a 17-month low which reinforced defensive demand for the Japanese currency.
To some extent, the Nikkei fall reflected the strengthening of the yen already seen rather than the stock market fall leading to fresh currency buying, but caution over global conditions will still provide underlying yen support.
Global growth fears were heightened by the US employment data which, coupled with the drop on Wall Street, pushed the yen sharply stronger to highs near 108.0 in US trading on Friday.
Sterling dipped to lows below 1.97 against the dollar in early Europe on Friday. The UK currency rallied back to levels above 1.98 after the UK and US data releases, but failed to hold the gains. Sterling was also unable to sustain recoveries against the Euro as defensive currency demand increased due to global growth doubts.
The PMI index for the services sector rose to 52.4 in December from 51.9 the previous month. There was also a stronger than expected reading for net consumer lending over the month while December mortgage approvals fell to 83,000 from 89,000 previously. The data is certainly not strong, but there will be some relief that there was no further deterioration at this stage.
There will still be strong expectations of an interest rate cut during the first quarter of 2008. Speculation over a January reduction is liable to fade very slightly which will tend to encourage some profit taking on short Sterling positions.
The Swiss currency remained firm on Friday as levels of risk aversion remained high. The franc strengthened to highs near 1.1025 against the dollar after the US data and retained strength against the Euro with a move to 1.6350. Risk conditions will tend to dominate in the short term with unsettled stock markets providing near-term franc support.
Swiss consumer prices rose 0.2% in December with the year-on-year rate increasing to 2.0% from 1.8% previously. Average inflation was held at 0.7% for 2007, but the data will create some National Bank caution over inflation trends.
The Australian dollar continued to probe resistance levels above the 0.88 level against the US currency on Friday, but struggled to extend gains. Although the domestic data has been firm, the expectations of a February interest rate increased have receded slightly given the global growth doubts. Higher domestic mortgage rates have also lessened pressure for the Reserve Bank to hike official rates.
Global growth and risk conditions will continue to be watched very closely and unease over the prospects will tend to restrain the Australian currency. There was a retreat to levels near 0.8730 in US trade as global stock markets fell.