Dollar Rallies Despite The Biggest Drop In Non-Farm Payrolls (NFPs) In 34 Years

This Friday, the United States' Bureau of Labor Statistics reported that Non-Farm Payrolls for the month of November fell by more than 533K, the most in 34 years. The Labor Department also said the unemployment rate rose to 6.7 percent, the highest level since 1993. However, despite these terrible numbers which highlight the terrible shape of the U.S. economy, the U.S. dollar didn’t get crushed as many analysts would expect. Instead, the U.S. dollar ended the trading session relatively unchanged against the world’s most heavily traded currencies. It is true that most recent economic indicators points towards a weakening of economy growth in the United States and lower interest rates could be needed to prevent the world’s largest economy to fall into a much worst recession. However, most of the price action in the currency market continues to be dictated by a wave of massive deleveraging in the financial sector, which has been favoring the U.S. currency since this financial crisis started. In addition, a considerable deterioration of economic growth in the rest of the world economy, is leading to a significant shift of interest rate differentials in favor of the U.S. dollar which could keep the U.S. Dollar well supported going forward.

Looking out over the economic calendar for next week, scheduled event risk is unlikely to change the dollar’s primary function as a safe haven for investors that have been burned by losses in traditional trading vehicles and a generally high level of volatility that has pervaded all markets. Nonetheless, speculation surrounding the outcome of the Fed’s next meeting on the 16th as well as the ongoing forecast for the eventual bottom to the ever-deepening recession will certainly be in the background. For interest rate expectations, the Fed’s secondary focus on employment and growth have already been well-defined by today’s disastrous employment numbers and the conservative NBER’s confirmation of a recession. However, interest rates may still play a role in how big their cut will be. Deflation is still a speculative term in the US (whereas officials in other major economies have already projected such conditions with some sense of certainty); so the import and producer price indicators could change the central bank’s tune. Usually, we would wait for the CPI figures for such confirmation; but forecasts of a negative turn in annual PPI (expected to cool from 5.2 percent to 0.2 percent) and import inflation (a 1.5 percent contraction after 6.7 percent pace) figures will surely threaten broad deflation with rates already near zero. As for growth, trade, consumer confidence and retail sales will take the measure.

Euro And Pound Struggle To Keep Their Footing As Multi-Year Lows Draw Closer

It was a rough week for the European currencies as rate decisions and readings on economic activity provided fundamental confirmation to speculators’ dour projections. It should be noted that neither the British pound nor the euro was able to capitalize on the biggest drop in US employment in over three decades. In fact, EURUSD held to the bottom of congestion zone between 1.2600 and 1.2800 while GBPUSD feigned a test of 1.45. While these moves do stand in testament to dollar strength, it also highlights a fundamental deficiency behind two economies that were considered the financial and economic equal (if not superiors) to the US just a year ago. Until investors are confident an end to financial crises and recessions in each economy are within site, these trends will be sustained. In the UK, policy makers are confirming the worst but have struggled to offer solutions. BoE Governor Mervyn King has confirmed the nation’s economic slump was the worst in decades and he has warned of deflation for months; yet the MPC’s rate cuts have yielded little in the fight to curb the contraction in growth and sharp drop in prices. For the ECB, the general sentiment has been that the Euro Zone economy has been and holding up better than its developed counterparts; but this attitude may have simply put the euro behind the curve. A warning from ECB President Trichet that negative price growth is a threat is new, and pressure is growing for the policy official to draft a plan to fight this trend should he be “trapped” when interest rates close in on zero.

For fundamental trends next week, there are a number of top and secondary tiered economic indicators scheduled for release; but will they genuinely impact a market that is already pricing in the worst? The pound seems susceptible to bearish encouragement so a number of releases may finally swamp six year lows and bring the market closer to the multi-decade, 1.37 swing low. Monday will bring producer price readings – a good source for confirmation to deflation fears. Feeding recession fears, traders will take in October trade numbers, BRC retail numbers, the leading RICS housing report, factory activity and the NIESR GDP estimate for November. For the euro, the scheduled fundamental fuel will be lighter with German factory activity and trade numbers, an investor confidence gauge and the ECB’s monthly report for December.

Canadian Dollar Responds To Sharp Drop In Employment, BoC Rate Decision Up Next

For those traders looking for volatility into the end of the week they would have found it in USDCAD. Not only was NFPs crossing the wires, but Statistics Canada’s own labor report offered a comparable surprise. The relatively conservative consensus forecast for a 25,000-person drop in national payrolls was blown out of the water by an actual 71,000 net loss. This was the largest single drop in 26 years with jobs being lost in every sector and in both part-time and full-time positions. With data like this, it is hard to believe that the rebound in 3Q GDP will survive a drop in domestic and foreign demand going forward.

After the release of this fundamental surprise, USDCAD rallied nearly 200 points to post a massive triple top at 1.30 before pulling back into the weekend. However, this may not be the last we see of this pivotal technical level and four-year high. Next week, a relatively active docket will be headlined by the Bank of Canada’s final rate decision for this year. Bloomberg’s survey of economists is predicting a 50 bps cut to 1.75 percent. This would keep the central bank on the slow-and-steady track; but will their pace change in light of degrading market and economic conditions?

Terri Belkas is a Currency Strategist at FXCM.