US Dollar: Another Shakeup in Sub-Prime Sector Takes the Wind out of Payrolls

· [B]US Dollar – Another Shakeup in Sub-Prime Sector Takes the Wind out of Payrolls[/B]
· Japanese Yen Extends Corrections, Signaling the Possible Return of Carry Traders
· Canadian Dollar Soars on Stronger Labor Market and Trade Data

US Dollar – Thanks to a stronger than expected non-farm payrolls report, the US dollar staged an impressive end of week rebound. Even though job growth was the weakest in 2 years, the health of the labor market was better than what many traders were anticipating. Having sent the CME derivatives down to 75.5k this morning, the market was leaning more towards a weaker report. However revisions remained the name of the game as January payrolls were notched up by 37k while average hourly earnings increased by a more than expected 0.4 percent. Average weekly hours dropped slightly but that may be related to the near record low temperatures in the month of February. In addition to the sharp upward revision the prior month, 505k people were not included in the household survey because of the weather; this the largest exclusion in 10 years and indicates that we could either see a strong rebound in March or a sharp revision to the February number. Both the stronger revision and the higher wage pressures will prompt the Federal Reserve to think twice about cutting interest rates in August. Before getting too dollar bullish however, the problems in the sub-prime lending sector continues to grow. We already know that New Century, the country’s second largest sub-prime lender is already at the brink of bankruptcy. However today, WMC Mortgage, the 9th largest sub-prime lender also announced that they will be closing 4 out of their 9 branches as well as cutting 20 percent of their workforce. The Fed is watching the sub-prime lending sector very closely as more investors become affected by the shakeouts in the sector. They also realize that this has significant implications for the housing market as a whole. Tighter lending rules could shave 200k home buyers from the market. Next week, we have a busy US calendar that starts off with retail sales on Tuesday. Yesterday, Wal-Mart blamed their weaker sales on the wintry weather. This suggests that next week’s retail sales numbers and the US dollar could also face downside risk. The trade deficit also narrowed in the month of January, which is sure to have contributed to the overall dollar strength.

Euro – The Euro slipped as traders adjusted their monetary policy outlooks for the ECB and Federal Reserve. ECB President Trichet basically told traders on Thursday not to expect an interest rate hike in April while today’s US data has some traders pricing in a later rate cut from the Federal Reserve. Eurozone data this morning provided little direction with stronger German data countered by weaker French data. The wholesale price index for the month of February and the trade balance for the month of January both came out much stronger than expected, but the French industrial production and trade balance figures deteriorated. Looking ahead, although next week’s Euro strength and weakness will most likely be determined by US data, there are a few notable releases on the Eurozone calendar. This includes the German ZEW survey, Eurozone CPI and the release of the ECB monthly bulletin for March. Even though the ECB is still on track to raise rates again some time this year, the economy could begin to feel the impact of the Value Added Tax increase in Germany which means that the ZEW survey runs the risk of surprising to the downside, especially as analysts are typically more pessimistic than businesses. Meanwhile Switzerland is scheduled to announce its quarterly monetary policy decision next week along with retail sales. The Swiss National Bank is expected to lift interest rates given the recent strength in the overall economy.

British Pound – Despite softer manufacturing data this morning, the British pound has strengthened against the US dollar, Euro and Japanese Yen. Industrial production increased by a less than expected 0.1 percent in the month of January while manufacturing production dropped by 0.2 percent. On balance, the British pound has not done little this week after having broken down the prior week. The economic calendar in the week ahead is more interesting which should deliver some pound driven flows. We are expecting producer prices, the trade balance, more reports on the state of house prices and labor market data. Overall, the UK economy is holding up well and we expect the reports to reflect that. We will have to wait until March 21st to have more light shed on the outlook for UK monetary policy.

Japanese Yen – The reversal in the Japanese Yen continued as the currency loses more ground against the majors. A rosier outlook for the US economy has encouraged some traders to jump right back into the carry trade. The NZD/JPY and CAD/JPY were the best performing currency pairs of the day, as hawkish comments from RBNZ Governor Bollard earlier this week has traders buying New Zealand dollars in hopes of higher yields. Overnight, the only piece of data on the calendar was January machinery orders which were stronger than expected. The stability in the equity markets should have central bankers from around the world including the Bank of Japan breathing a sigh of relief. If the stock markets continue to rebound, traders may be comfortable enough to return their focus to the BoJ’s rate tightening cycle. Looking ahead, we are expecting second quarter GDP, current account, Domestic CGPI, consumer confidence, industrial production and leading indicators next week. The Japanese economic calendar is busy which suggests that the market may continue to focus on the Yen.

Commodity Currencies (CAD, AUD, NZD) – The commodity currencies are all up strongly today thanks to a return of carry trade demand and firmer economic data. There were no Australian and New Zealand data released last night, but traders are most likely still reeling off of the hawkish comments from the RBNZ earlier this week. Canada on the other hand reported a firm rise in employment for the month of February and an unexpected increase in the trade surplus for the month of January. The Canadian economy has been performing very well and we are finally seeing that filter into loonie strength. In the week ahead, labor productivity, manufacturing shipments and capacity utilization are the only pieces of CAD data on the calendar. Australia will be reporting business confidence, labor market data and consumer inflation expectations. New Zealand has house prices, the Manpower survey and retail sales on the docket.