IB FX View

Green shoots, green lights

Friday June 5, 2009

The employment report has blown away the sanity of the most learned economist this morning after a lower number of jobs were reportedly lost while the rate of unemployment surged to a 9.4% reading. The 345,000 jobs lost was a far lower number than the consensus expectation of 525,000, and is being taken as yet another sign that the worst is over. As such the dollar fell out of bed this morning as investors decided that they really don’t need the safety of the U.S. dollar anymore. But shortly after that decision was made, the floodgates closed rapidly and we’re now seeing a dollar rally. Friday will prove to be a rather interesting trading day!


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The 6 million jobs lost since the December 2007 recession began is only set to increase possibly throughout the remainder of the year. We have to be very careful not to make too much of the report for a couple of reasons. First, the outright numbers show continuing job cuts across U.S. companies. Yet still, it’s imperative to recognize, while the numbers are shortening, U.S. job losses continue.

Within 156,000 manufacturing jobs reportedly lost in May, some 29,800 stem from auto manufacturers and within the auto parts industry. We don’t need to be reminded that it was this very week than GM filed for Chapter 11. It does seem a long time ago, but it’s true. Builders cut half the amount of jobs they shed in April with May’s losses reported at 59,000. Financial firms cut 30,000 workers in May after 45,000 in April. Retailers during May cut half the numbers shed during the previous month. While the magnitude of losses is helping the direction is still wrong.

Second, more workers are joining the labor force, which helps explain the rising rate of unemployment. Aging individuals who had previously believed that they could sail towards retirement are fast realizing that their real estate and their investments aren’t quite the golden nest egg they had once expected them to be. As such more individuals in their fifties and sixties are looking for income.

Finally, bond traders took the report as a green light to sell bonds and send yields surging on the news. The yield on the government 10-year note on Thursday closed at around 3.71%, but following the report read 3.85%. The aim of the government and Fed’s plans to buy mortgage and government debt from the market is to drive yields lower. The so-called green shoots of recovery are tangling amongst these ambitions and run a real risk of stifling any recovery.

Chairman Bernanke made it clear midweek that not only does he expect weaker prospects for the labor market this year, but the result would be a further threat to consumption especially if credit markets begin to freeze over again. Yesterday, Freddie Mac noted the sharp weekly shift higher in the core 30-year mortgage rate, which does the stability in the housing market precious little good.

The employment report also seems to have set off a green light to currency markets to sell the Japanese yen. We noted yesterday how the government had reported an increase in Japanese interest in foreign bonds and so today’s U.S. employment report has set in motion increased appetite for higher-yielding foreign assets. The dollar was the major beneficiary rising to 98.25 from 96.67 at one point.

Appetite for Canadian and Australian dollars has stalled in light of today’s reading. Rather the curious positive impact on the U.S. dollar has signaled a green light to a rethink over the appeal of commodity currencies as a hedge against the hitherto weaker greenback. Earlier, the Aussie unit had benefited from a rise in building work and had lifted the unit. However, the Aussie is messing perilously with the 80 cent marker, beneath which investors might quickly fade their appeal for more.

In the case of the Canadian dollar, there was separate disappointment after the government released its latest jobs report. April’s data shocked the market as 35,900 jobs were unexpectedly added to the economy, but the data was tarnished today by the announcement of a greater job loss for May with 41,800 job cutbacks. So this means that job losses have now piled up for six of the previous seven months.

In essence the Canadian economy is back on a losing path and the danger building is one of over confidence. The TSE composite stock index has risen 40% from its March 6 low, while the remarkable recovery in the Canadian dollar from $1.30 to $1.08 against its southern neighbor has typically left analysts extrapolating parity as the next achievable target. The over confidence we refer to was a point picked up on by the Bank of Canada on Thursday as it chose to leave interest rates unchanged. It noted that the rapid ascent of its domestic dollar had the potential to fully offset the recent improvements in financial conditions.

Dollar strength today is no stronger against the euro at $1.3981 than it is against the British pound at $1.5971. Percentage wise the losses are the same. The question as to whether one would expect the British pound to suffer a harsher fate on perceived increased political risk rests really on your perception as to whether the latest meteoric rise in the value of the pound was too far too fast. There’s no denying that the fluid political situation in Britain is heating up to cook-out proportions, but we’re not alone in taking the view that change will benefit the pound rather than weaken it.

The resignation of the Pensions secretary, slinging mud as he left in calling for Prime Minister Brown to do the same (resign, not sling mud) was followed by that of the Defense minister to make that six for the week. While Friday is turning out to see ministers close ranks around an allegedly calm Mr. Brown, one wonders whether he’ll call it quits over the weekend.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com

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