US Dollar Slips as Consumer Credit Falls By Record, Non-Farm Payrolls (NFPs) Expected to Fall By 500K or More

The US dollar fell versus most of the major currencies on Thursday, save the Australian dollar, as consumer credit fell by the most in at least 65-years and continuing jobless claims reached a new 26-year high. According to the Federal Reserve, consumer credit in the US fell for the second consecutive month by a record $7.9 billion in November. More specifically, non-revolving debt, such as auto or student loans, tumbled by $5.2 billion and revolving debt, such as credit cards, declined by $2.8 billion. Overall, this highlights a shift in attitude amongst Americans away from the feeling that they could spend freely on designer goods with the help of credit cards toward a far more risk averse sentiment in which consumers opt to pay down debt and spend conservatively. Ultimately, this will be a negative for high-end retailers and stores that do not have the ability to offer deep discounts, as they essentially performed well only when consumers had no inclination to save.

Meanwhile, US initial jobless claims fell by 24,000 during the week ending January 3 to 467,000, but as we mentioned last week, employment reports for the last two weeks of 2008 should be ignored as the closure of government offices on the holidays, such as New Year's Day, skew the numbers. However, this makes the results of the count of continuing jobless claims even worse, as they rose by 101,000 to a fresh 26-year high of 4.611 million during the week ending December 27 despite the fact that fewer people would be able to file claims. This does not bode well for tomorrow's releases at 8:30 ET, as US non-farm payrolls (NFP’s) are forecasted to fall for the twelfth straight month in December at a rate of -520,000. Something that is garnering even more attention though is the rise in the unemployment rate, which is predicted to match the June 1993 high of 7.0 percent from 6.7 percent. Results in line with or worse than expectations would suggest that consumption, and growth in general, will continue to wane throughout 2009, and could weigh on the greenback.

Euro Ends Day Just Below Key Resistance - Will Euro-zone Retail Sales Weigh on Friday?

The euro continued to edge higher versus the US dollar, but major resistance at 1.3750 is blocking the pair’s way higher. Economic data out of the Euro-zone still suggests that the European Central Bank will cut rates next Thursday, but as we saw with the British pound and the Bank of England’s rate cut today, that doesn’t mean the currency will automatically fall lower. Nevertheless, looking at the data on hand, a measure of confidence amongst European consumers and executives fell during December to the worst level since record keeping began in 1985, suggesting that consumption is sure to slow further and businesses are far less prone to invest. Furthermore, the Euro-zone’s unemployment rate rose to a two-year high of 7.8 percent in November from 7.7 percent, and given the dour outlooks for the economy, the deterioration of the labor market is likely to worsen. Friday’s data should add to this gloomy mix, as retail sales growth in the Euro-zone is forecasted to have stagnated during the month of November, leaving the annual rate negative for the sixth straight month. Such a result would be in line with the steady drop in the Purchasing Managers' Index (PMI) for the Euro-zone services sector, which has signaled a contraction in business activity throughout the second half of 2008. In fact, given this correlation, the timelier PMI results suggest that retail sales will remain weak not only in this reading for November, but for December as well. The impact on the euro should be minimal, barring a sharp, unexpected decline.

British Pound Surges Following Bank of England’s Rate Cut - Why?

The British pound remained strong on Thursday, gaining against every major currency except the Japanese yen and Canadian dollar, despite the fact the Bank of England cut the Bank Rate to the lowest level since the bank was founded in 1694. What gives? First of all, the BOE’s 50 basis point reduction was in line with expectations, so there was no surprise factor coming in to play. Meanwhile, though the Monetary Policy Committee’s (MPC) subsequent policy statement was quite bearish on economic conditions in the UK and abroad, they did not give any indication that they would cut rates again during their February 5 meeting. In essence, the British pound’s rally today indicates that the currency’s nearly 30 percent drop against the US dollar and 53 percent plunge versus the Japanese yen over the past 6 months has gone above and beyond pricing in rate cuts by the BOE. At this juncture, actual rate cuts are having little impact on the currency markets, as traders are more focused on comparative long-term interest rate expectations.

Canadian Dollar Could Pull Back on Friday

The Canadian dollar held its own against the US dollar on Thursday, despite the release of disappointing data, as the Ivey Purchasing Managers’ Index (PMI) tumbled to a record low of 39.1 in December. This marked the second straight month that the index held below 50, which signals a deterioration in business activity, and a further breakdown of the report also shows that employment conditions contracted for the fourth consecutive month. This reading suggests that Friday’s releases could have bearish implications for the Loonie, as the Canadian net employment change is forecasted to have fallen by 20,000 during December while the unemployment rate is anticipated to have risen to a nearly three-year high of 6.5 percent from 6.3 percent. Since the employment change tends to be a very volatile release, this should have the greatest impact on the Canadian dollar, with a sharper than expected drop likely to weigh on the currency and an unexpected positive result likely to push it higher.

Terri Belkas is a Currency Strategist at FXCM.