Analysis is subjective at best and there is no scientific absolute one can bring forth through quantitative mathematical formulas to show why markets moved in any particular fashion. In that given light, the USD erupted on Friday and gained significantly on all currencies and this came on news which may appear at first glance contradictory. Non Farm payrolls came out much stronger than anticipated with a result of minus -345K compared to the forecasted minus -520K. However the U.S. also published its official Unemployment Rate and it came in with a result of 9.4%, worse than the already bad estimate of 9.2%. Bringing the above full circle, while the Non Farm numbers at first glance appears to be a good, a large amount of data upon closer inspection of the report showed that employers continue to plan on further job cuts and are reducing the amount of hours worked by staff at a wicked pace. Furthermore, the Unemployment Rate was the highest reading in twenty five years.
The equity markets are a barometer in which to gauge the results of the employment data fully. The markets did not climb like gangbusters on the Non Farm Employment Change numbers and in fact the S&P turned in a negative day. Thus, while some argue that the USD gained on what appeared to be good news, it can certainly be argued that the statistics actually were still rather sour. This will be a relatively quiet week for U.S. data and no major releases are forthcoming today. What we can expect is that government officials will put their spin on the employment numbers from Friday and that investors will be left to read the tea leafs. Trade Balance data will be released on Wednesday and on Thursday the Retail Sales statistics are on the calendar. Also lurking in the shadows will be talk about mortgage rates in the U.S., which are slowly edging higher and causing alarm bells to sound. Equity markets in the States will be a sounding board for risk appetite. The USD had a good day on Friday and this could make for a volatile Monday.
The EUR suffered a poor Friday in dollar centric trading and news that the Latvian banking problems are growing. Speculation is rife that if Latvia continues to stagger and begins to default that Sweden will be confronted with difficulties immediately. Thus the fear of contagion is growing. Some may not like the following argument, but the problems in the Baltic countries and those in some of the Eastern European countries, of which the European Union has very strong ties to, can be compared to the problems of General Motors in the United States. For months now, the problems of the Baltic countries have been known and many in Europe appeared to try and put a band aid on what really needed major surgery. In the case of the U.S. it now has accepted that G.M. needed to be vastly reorganized, it remains to be seen if the finances of Latvia and others in Europe will eventually find the same recognition before it is too late. Today German Factory Orders data will be published and the estimate is for the reading to be unchanged from the previous month. The EUR may continue to find that it is trading based on the lingering results and developments from Friday.
The Sterling was taken lower again on Friday in a chainsaw like manner. News from the political front regarding Gordon Brown�s political future continues to cause shock waves within market sentiment. The resignations that have plagued Brown�s Labor Party government are now apparent to all and it appears that it is only a question of when and not if Brown�s ability to lead will have completely disappeared. The BRC Retail Sales Monitor will be released today, last month�s result produced a gain of 4.6%. Also the RICS House Price Balance reading will be published. Making waves in the GBP trading may be MPC member David Blanchflower�s comments that the Bank of England will have to increase the amount of quantitative easing it is undertaking in order to stimulate the economy. Blanchflower also said that the U.K. faces a slow road to economic recovery. It should be remembered that the GBP has had two good months of trading against the USD. The GBP stands at a precarious juncture and is sure to face a test of its sentiment again today.
The JPY lost significant ground to the USD on Friday as it approached the weaker part of its broad range against the greenback. Gold also took a hit on Friday as it went back down to the 960.00 USD mark. It was a volatile day of trading on Friday and this essentially sets up the first couple of days of trading this week to be opportunistic ones in which traders will need all their wits.
Written by: Robert Petrucci
Bforex Chief Commodity Expert and Forex Analyst