4 June 2010
US non-farm payrolls are one of the most important data releases in the currency markets, since jobs (preferably good ones at that!) are the lifeblood of any economy. Today sees the June release of the figures, with an estimated 508,000 jobs added in May, by far the largest estimate ever.
Adding over 500,000 jobs to the economy would hearten even the biggest bears and, you would think, be strongly positive for the Dollar. But there is much more to this number than meets the eye. Firstly, the ranges of forecasts are the broadest ever, with the lowest coming in at 100,000 jobs added and the highest at 750,000. Given the past records of the economists making the forecasts (the average ‘miss’ is 70,000 jobs) we could be looking at the largest forecast error on record as well.
The problem then becomes deciding what will happen to Dollar after the release. A huge ‘miss’ of 200,000 means the US would still have added over 300,000 jobs in May but the Dollar may still fall on the back of it. If the forecasts are correct and we see a gain of over 500,000 (as said before the largest ever). If the market has priced this in we may see no move at all. The conclusion? What seems like extremely bullish data at first glance may be the largest but also the strangest and most confused NFP data ever.
The Euro is retesting lows seen two weeks ago as data from the ECB showed Eurozone banks depositing record amounts of cash in the ECBs overnight facility. Increasing worries over loan losses and sovereign default means banks would rather keep funds at the Central Bank than lend it out in the inter-bank money markets. Alongside the jittery banks, European consumers continue to hang on to their cash instead of spending, with retail sales figures again disappointing.
Data showed a monthly fall of 1.2 per cent against a forecast gain of 0.1%. Although we have seen a tightening of late, Spanish, Italian and Greek bond spreads over the German Bund have begun to widen again reflecting the fact that the Euro problem still has a long time yet to run and that the initial effects of the ECB bond buying scheme has started to wear off. GDP data released today will hopefully help to arrest some of the decline.
Sterling looks set to finish the week slightly up having dropped back from the highs of Wednesday when the AIA-PRU deal broke down. Any BP dividend cut resulting from the saga in the gulf of Mexico will likely push Sterling down further as traders anticipate that the usual USD/GBP transactions in the run up to the dividend payment will be reduced or may not happen at all. Sterling may also face downside pressure from the anticipated CGT increase as assets are sold off to take advantage of the lower current rate.
Look for light trading conditions this morning as we await non farm payrolls but as mentioned above depending on what number we get, we may be in for choppy seas this afternoon.
Report by Alistair Cotton
Currency Market Updates by Tom Nadir
The contents of this report are for information purposes only.
