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Weekly FX Report (05-06-2011): US jobs data sees greenback slump

It was a mixed bag in the markets this past week, as a slew of weaker than expected data cast fresh uncertainties over the health of the global economic recovery and dragged the US Dollar and equities lower. US and leading European equity markets closed lower across the board, with the Dow and S&P500 perhaps the largest losers on the week, shedding -2.35% and -2.32% respectively.

By Gaurav Kashyap, Alpari ME DMCC

The US Dollar dropped -2.00% to hit an all-time record low against the Swiss Franc at 0.8330, as safe haven assets got a nice boost following a combination of poorer manufacturing, housing and jobs data put the US recovery in serious doubt. Other than the Swiss Franc, perhaps the only bright spot in trading last week was the Euro which surged on the back of renewed risk appetite following Friday’s announcement that confirmed Greece would be receiving its next tranche of bailout aid.

Slow down in US employment figures

Friday’s US nonfarm payroll showed that employment growth in the US slowed significantly during May, with only 54K new jobs being added. With expectations already downgraded to 170K following a far weaker ADP reading on Wednesday (38K act v 179K prev), the reading spooked US equity markets and saw the US Dollar weaken across the board.

Although it was the eighth straight month of positive employment growth in the US, the size of the gain as compared to April (+232K new jobs) was particularly worrying. A more detailed view of the report showed that hiring in the private nonfarm sector also slowed to 83K new jobs added (v 251K prev) and manufacturing payrolls was the worse off, contracting to -5K (v 24K prev). The overall unemployment rate increased to 9.1% (v 8.9% exp / 9.0% prev).

The jobs report capped a torrid two weeks of US data – along with Friday’s jobs report, there was a noticeable slowdown in the manufacturing and housing. The Institute for Supply Management’s (ISM) report on business showed that activity in the manufacturing sector dropped to 53.5%. A reading in excess of 42.5% generally tends to indicate an expansion, however May’s reading was the lowest in 19 months and 6.9% lower than April’s reading of 60.4%. The ISM new orders index dropped to 51.0% in May, down 10.7% from April’s reading of 61.7% while the production index also registered a slower month at 54% in May, as compared to 63.8% in April.

Earlier in the week, US factory orders showed a contraction to -1.2% during April (v 3.8% prev) , US consumer sentiment dropped to 60.8 (v 66.0 prev) while the US Case-Shiller home price index contracted to -5.06% (v -3.79% prev). The recent run of poor data from the US reignited chatter about potential QE3 measures and although this notion might be slightly premature, the data certainly eased interest rate expectations, with a hike more likely in 2012.

Euro sees rise against US Dollar, British Pound

Across the pond, the Euro was well bid in trading this past week, gaining across the board and more notably against the US Dollar and British Pound, where it appreciated 2.24% and 2.65% respectively. Much of the gains in EURUSD were pinned to the underperforming Dollar, but it was Friday’s announcement that confirmed Greece would be receiving another tranche worth $12bn that sparked a fresh wave of risk sentiment, taking the pair past 1.46 levels.

The announcement saw an end to weeks of doubts and saw the pair stage a comprehensive break above 1.45 for the first time in almost a month. With the markets finally feeling some sort of Greek closure following Friday’s announcement, Euro traders will turn their attention to Thursday’s ECB rate decision and a host of key economic releases releasing throughout the week in the build up to that rate decision. With rates expected to be on hold at 1.25%, price movement in the Euro will be driven by Trichet’s comments about a potential hike in July’s meeting along with the release of several key numbers including Eurozone producer prices, retail sales & the Euro-zone GDP reading.

The central banks of England, Australia and New Zealand will also be announcing their rates this week with all three expected to hold. Last Wednesday’s weaker Australian GDP reading (QoQ -1.2% act v 0.8% prev / YoY 1.0% act v 2.7% prev) confirms the current weak patch of data emerging from down under and throws future growth prospects into doubt. The story isn’t much different for the Bank of England who are largely expected to keep their rates on hold at 0.50% following a run of rather sub-par data releases.