Few would argue that the US economy is mired in recession; but the dollar traders are more concerned with signs that the economy may be showing signs that its collapse is slowing. This was a fundamental assertion that was given weight by the advanced reading of the first quarter GDP release and today furthered by the reduced pace of job losses.
According to the Labor Department, 539,000 Americans lost their jobs in April to bring the unemployment rate rose to 8.9 percent. Even with historical context, these are severe numbers. Overall, the jobless rate in the world’s largest economy is at its highest level since 1983. What’s more, these levels will likely continue to rise even if the nation’s recession starts to taper off. At this point, President Barack Obama’s warnings that this rate could rise into double digits before improving looks to be more of an inevitability than a mere political warning. However, for speculators, the month-to-month change is the more important indicator as it is more timely and volatile. Looking at the data objectively, payrolls have contracted for 16 consecutive months for a total 5.738 million lost positions since the beginning of 2008. However, the severity of these consistent declines has let up somewhat over the past few months. After four months of losses greater than 600,000, April’s number offers a modest reprieve from the labor reports oppressive pace. This is where the sense of cautious improvement arises.
However, traders express their sentiment through their trades; and the immediate reaction to the event risk suggests that the improved pace of decline was less than what was expected. Over the past week, bullish forecasts were clearly leading actual data as complementary indicators reflected the same reduced pace of deterioration. Consumer and business confidence has improved, initial jobless claims pulled back, layoffs were tempered and the ADP private payroll report (the closest approximation to the government number that the market can get) offered an impressive downshift of its own. On Wednesday, the ADP report crossed the wires 154,000 under the market’s consensus at 491,000. This two indicators are very different in their composition; but the comparisons (and volatility it derives) are inevitable.
After the report, the dollar has tumbled against most of its major counterparts, with a notable 80 point rally for EURUSD. The bigger picture shows the dollar index (a trade weighted index) is on the verge of completing the bearish reversal in early March with a true turn to trend. With a broad range of economic indicators due next week and the currency’s safe haven status suffering as risk appetite rises; we could be due for a major shift next week.
Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at <[email protected]>.