Fed Announcement and ADP Helps to Lift the Dollar

Positive economic data has continued to drive the US dollar higher. Payroll provider ADP reported a 9k rise in jobs this month. As one of the leading indicators for non-farm payrolls, this along with stronger consumer confidence numbers is good news going into this Friday’s non-farm payrolls report. However don’t expect positive job growth in the month of July. The only thing that the ADP number suggests is that the number of job losses could be less severe than the prior month. The four week moving average of jobless claims have also fallen in the week ending July 19 even though initial claims climbed to 406,000. Nonetheless, we can not forget the countless layoff announcements that have surfaced over the past two months and the fact that US companies are cutting back. ADP has a track record of being notoriously optimistic about projecting payrolls. Non-farm payrolls dropped in each of the past six months but between January and June, the ADP employment survey on the other hand only dropped 2 out of the 6 months. ADP has consistently missed to the high side and we expect the same this month. Meanwhile a surprising announcement from the Federal Reserve has also helped to rally the US dollar and US stocks. “In light of continued fragile circumstances in financial markets,” the Federal Reserve extended the tenure of their Primary Dealer Credit and Term Securities Lending Facilities. This means that in addition to their 28-day loans, they will also be selling 84-day loans. In response, the European Central Bank and the Swiss National Bank will also be making 84-day funds available at dollar auctions. These actions should help to calm the markets, especially as the rally in the stock market continues to ease risk aversion. However the changes are incremental since the Fed is simply tweaking their existing programs to give themselves more flexibility when there are times of “elevated stress.” As we have been mentioning all week, the dollar should continue to rally. The advance release of second quarter GDP is due for release tomorrow. Despite the inherent problems within the US economy, GDP growth is expected to accelerate thanks to the rise in retail sales.

Euro Continues to Slide on Mixed Economic Data

The Euro continued to trend lower despite mixed economic data. Eurozone Retail PMI rose from 36.3 to 38.2 in July thanks to stronger activity in Germany and Italy. However despite the improvement, the index remains at very low levels, reflecting the troubles in the overall economy. Consumer and business confidence on the other hand continues to trend lower. This is in line with the drops in the German IFO report and the ZEW survey. We still believe that the EUR/USD is headed for further losses and a break below 1.55 may just be a matter of time. German unemployment data is due for release tomorrow along with Eurozone consumer prices. The rise in the employment component of service PMI suggests that the number of people claiming unemployment benefits will fall once again. As for consumer prices, the number should continue to reflect strong inflationary pressures. Meanwhile Switzerland’s KoF report of leading indicators was weaker than expected. Despite the rise in the UBS consumption index, the outlook for the Swiss economy has deteriorated. However we still believe that Switzerland is faring much better than many of its other G10 counterparts.

British Pound Headed Lower – Watch Out for Consumer Confidence

The British pound struggled amidst dollar strength and news that Lloyds TSB, a major UK bank reported a 63 percent drop in income. Like many other banks around the world, Lloyds has been hit by the credit crunch and slowdown in investment banking. We continue to believe that the UK economy is in bad shape and the pace of deterioration will accelerate. There was no economic data released this morning, but the GfK consumer confidence survey is due for release tonight. Rising food prices, falling house prices and problems in the labor market should weigh heavily on UK consumer confidence and the British pound. The only other piece of UK data due for release this week is PMI on Friday.

Australian and New Zealand Continue to Fall

The Australian, New Zealand and Canadian dollars have fallen under the weight on lower commodity prices and broad dollar strength. Gold broke below the psychological $900 an ounce mark on an intraday basis to hit a monthly low (it has since recovered). Australian building approvals were much weaker than expected, dropping by 0.7 percent last month instead of rising by 1.0 percent like the market expected. RBNZ Governor Bollard talked down the Kiwi when he said that the weak economy justifies the easing bias. In other words, he is confirming that interest rates will continue to fall and for that reason, we expect the New Zealand dollar to make a run below 70 cents. Canadian economic data on the other hand was very positive with industrial product and raw material prices rising strongly in the month of June.

Yen Crosses Struggle Despite Stock Market Rally

The Japanese Yen crosses struggled despite the rally in US stocks. Japanese industrial production was weaker than the market expected, reflecting the overall problems in the Japanese economy. Labor cash earnings are due for release tomorrow and even though the market is expecting earnings to rebound, there is a greater chance that it will miss. Looking ahead, we still expect further gains in USD/JPY and consider this latest retracement a hiccup before a move towards 110.

Kathy Lien is the Chief Currency Strategist at FXCM.