US Dollar Slips to 2 Year Low Against Euro ahead of Payrolls (page 1 of 2)

DailyFX Fundamentals 04-05-07

By Kathy Lien, Chief Strategist of DailyFX.com


US Dollar - Liquidation of long dollar positions ahead of the holiday weekend has pushed the greenback to fresh 2 year lows against the Euro. There have been some rumors that tomorrow's non-farm payrolls release may not be as hot as the market is expecting, but there hasn't been data to confirm that. The CME payroll derivatives auction settled at 121.6k this morning, which indicates that traders are less optimistic about job growth than economists. However 121k is still good, especially since Monster.com reported that their employment index rose from 185k to 177k, which is reflective of strong job growth. To read our full NFP Preview, please go directly to DailyFX. US, UK, French, German and Swiss markets are all closed for Good Friday tomorrow. This means that volume will be particularly low, which could lead to abnormal volatility. The current median forecast for payrolls is 133k, but according to the poll by Bloomberg News, the estimates range from 70k to 240k. Equally reputable names are calling for vastly different results. BNP Paribas expects job growth to be very weak (they have the 70k estimate) while Citigroup expects it to be very strong (hence the 240k). There are number of reasons to believe that job growth will be strong. The 4 week moving average of jobless claims in March was 315k, down from 335k in February. The last time the 4 week moving average of jobless claims were this lean was back in December 2006 and January 2007, when US companies added 226k and 146k jobs to their payrolls respectively. Payroll agency ADP has reported stronger job growth while Challenger Gray and Christmas reported a sharp drop in layoffs. Temperate weather should also bring back construction sector jobs. The only problem that the generally optimistic forecast faces is the possibility that less layoffs does not translate into more hiring. Corporate profits have hit a peak, which would give businesses reason to wait for more economic stability or signs of growth before expanding operations. In addition to the headline number, we have come intimately familiar with the need to watch for revisions because revisions have become the name of the game. Back in February, the dollar rallied not because the headline number was stronger than the market's forecast by 3k, but because January payrolls were revised up by 35k. The same thing happened when January payrolls were released. The headline number actually fell short of expectations by 39k, but any dollar bearishness was offset by the same 39k upward revision to December payrolls.

Euro - The Euro has broken out of its inverse head and shoulder pattern to hit a new 2 year high against the US dollar. In doing so, it has taken EUR/JPY to 30 pips shy of its highest level since the inception of the Euro. Economic data continues to be firm with German industrial production jumping in the month of February. The market was looking for manufacturing activity to drop by 0.5 percent, but instead, it accelerated by 0.9 percent. This gives the European Central Bank justification to raise rates again as early as May. However, the sharp rise in the Euro over the past few months may force the ECB to reconsider raising rates beyond that. A rising Euro automatically tightens the economy and reduces inflationary pressures. As we get closer to the EUR/USD's 1.3667 all time high, the more strain the strong currency will put on the export dependent economy. Remember our saying; the path to a stronger Euro is through a weaker one.