US Dollar Pulls Back as Americans Lose Most Jobs Since 1971, Stocks Rally - Why?

The US dollar fell versus most of the majors on Friday as US non-farm payrolls fell in line with expectations by 598,000 in January, while the December reading was revised down another 53,000 to -577,000, indicating that the US economy lost a total of 3.57 million jobs in 2008. As a result, the unemployment rate has now climbed to a nearly 17-year high of 7.6 percent in January from 4.7 percent the month before the US recession began in December 2007. This clearly does not bode well for consumption and broad economic growth going forward, and also puts additional pressure on Congress to pass the stimulus plan currently being debated. In fact, much of the 2.7 percent gain in the DJIA was attributed to hopes that the bill will successfully pass a vote by the Senate, as an $819 billion version of the bill has already passed in the House. In a similar vein, consumer credit fell for the third straight month in December by $6.604 billion as Americans seek to pay down debt and cut back on credit card spending.

All of this data is clearly negative from a fundamental perspective, but much of evidence of recession is already priced in to the US dollar. Judging by the similarly sharp drops we saw in the Japanese yen and the surge in equities, the decline in the greenback likely had more to do with improved risk appetite, and traders will need to keep these correlations in mind next week as Federal Reserve Chairman Ben Bernanke is scheduled to testify in front of the House Financial Services Committee on the central bank’s lending programs at 13:00 ET on Tuesday. Part of this will probably include explanations as to why the Federal Reserve announced on Friday that they would delay plans to start lending under a $200 billion program called the Term Asset-Backed Securities Lending Facility (TALF). TALF will allow the central bank to lend to holders of AAA rated debt backed by newly and recently originated loans, including education, car, credit-card loans, and loans guaranteed by the Small Business Administration. For more on news that could impact the forex markets this week, check out our look at the Top 5 Market Movers for the Week of 2/9/09.

Euro Ends Friday Mixed as Yield Differentials Drive Price Action

The euro ended Friday down against the Australian dollar, New Zealand dollar, and British pound but gained versus the Japanese yen, US dollar, Swiss franc, and Canadian dollar. There was little in the way of European releases, but a surge in risk appetite benefited currencies with central banks that either maintain relatively high interest rates (Australia, New Zealand) or have signaled that they will leave rates steady going forward (UK). On the other hand, currencies associated with interest rates near zero (US, Japan, Switzerland) or with interest rates that have the potential to fall lower (Canada) tumbled. The euro happens to fall right in the middle of this spectrum since the European Central Bank left rates at a relatively high 2 percent on Thursday, but suggested that they may cut rates in March. This dynamic will likely hold over the next few weeks, making risk trends increasingly important to watch, as well as technical levels.

Looking ahead to Monday, the release of the German trade balance is forecasted to reflect a smaller surplus in December from a month earlier of 8.2 billion euros, down from 9.7 billion euros. This will likely be the result of further declines in exports, which are forecasted to fall for the third straight month at a rate of 4.0 percent, following a record 10.8 percent plunge in November. However, imports are also anticipated to slump further at a rate of 3.9 percent amidst weaker energy prices and waning demand, which could provide a somewhat-artificial boost to the overall surplus. This report does not tend to be extremely market-moving for the euro, but should nevertheless provide a good gauge of conditions in the Euro-zone since Germany is the region’s largest economy. The biggest event risk for the euro looms on Friday, as Q4 GDP for the Euro-zone is forecasted to fall by the most since record keeping began in 1995.

British Pound Gains as Dismal UK Data Broadly Priced In to Currency

The British pound was very strong against the US dollar and Japanese yen on Friday, though the currency faltered against the indomitable Aussie and Kiwi dollars, suggesting that most deeply disappointing data has already been priced in to pound. UK industrial production fell 9.4 percent in December from a year earlier, the most since January 1981, thanks to a 2.2 percent drop in manufacturing output during the month alone. Indeed, the combination of waning domestic and foreign demand has proven to be a toxic mix for UK’s manufacturers. Adding to this gloomy news, the government reported that corporate bankruptcies rose 11.9 percent during the fourth quarter and 51.6 percent from a year earlier, while individual insolvencies increased 8.2 percent in the fourth quarter to 29,444, highlighting the impact of the credit crunch on businesses and consumers alike. As a result, the Bank of England announced measures to improve liquidity on Friday, saying that it may start buying commercial paper on February 13 through its asset purchase facility.

Canadian Dollar the Weakest of the Commodity Bloc as Economy Loses Record Number of Jobs in January

The commodity dollars were the strongest of the majors on Friday, but compared to the high-yielding Australian dollar and New Zealand dollar, the Canadian dollar was a laggard. The currency initially fell sharply as the Canadian net employment change fell by a record 129,000 in January, compared to expectations for a -40,000 print. Risk trends seem like to drive the Aussie and Kiwi going forward, but the Loonie could be a bit more data-drive. On Monday, Canada Mortgage and Housing Corporation is anticipated to report that housing starts slowed to an annual pace of 169.3K in January, down from a revised 172.2K in December. This would mark the fifth straight month of weaker results, as well as the lowest reading in over 7 years. Keeping the sharp deterioration in the Canadian labor markets, as reflected in Friday’s net employment change of -129K, disappointing housing reports will only add to evidence that the nation’s economy is in the midst of recession. This leaves potential open for Canadian dollar declines, though a stronger-than-expected result could lift the currency on a short-term basis.

Terri Belkas is a Currency Strategist at FXCM.