US Dollar, Japanese Yen Bounce as US Stocks Fall Over 4% Ahead of Friday’s US Non-Farm Payrolls (NFPs)

The US dollar and Japanese yen both gained as risk appetite faltered on news that China unexpectedly did not announce new stimulus measures and amidst indications that General Motors (GM) could be forced to file for bankruptcy protection. Indeed, GM’s auditors, Deloitte & Touche LLP, said that there is “substantial doubt” that the automaker will be able to continue operating without a massive restructuring plan due to the firm’s “recurring losses from operations, stockholders' deficit, and inability to generate sufficient cash flow to meet its obligations.” US economic data was generally mixed, but still reflected bleak economic conditions. First, US jobless claims fell less than expected, with initial claims down by 31,000 to 639,000 during the week ended February 28 while continuing claims fell 14,000 to 5,106,000 during the week ending February 21. Ultimately, though, initial jobless claims remain very close to their 1982 highs and the drop does little to suggest that employment conditions have improved, especially since continuing claims remain close their highest levels since record-keeping began in 1967.

Meanwhile, the Mortgage Bankers Association (MBA) of America said that mortgage delinquencies climbed 7.88 percent during Q4, the biggest increase since record-keeping began in 1972. Meanwhile, inventory foreclosures associated with subprime, adjustable rate mortgages were up a record 22.18 percent, which only highlights the fact that these particular types of mortgages along with lax credit standards are some of the main causes for the housing market collapse. This is much of the reason why the government has proposed their “Making Home Affordable” program where they will offer incentives to persuade mortgage-servicing companies to modify the loans of borrowers who are deemed as being at risk of foreclosure. The program would allow for mortgage-servicers to lower interest rates as low as 2 percent, extend payment periods, or make other modifications to bring the borrower’s monthly payment down to 31 percent of their income.

The big event to watch on Friday will be the release of US employment data. Based on both a variety of leading indicators, Friday’s release of US non-farm payrolls (NFPs) is likely to show job losses for the fourteenth straight month in February. At the time of writing, Bloomberg News was calling for NFPs to plunge by 650,000, leaving 2009 to continue on a very negative note. Something that is starting to garner even more attention is the unemployment rate, which is projected to hit 7.9 percent, the highest since January 1984. The steady accumulation of job losses does not bode well for economic growth going forward, as falling incomes will only contribute to further contractions in personal spending. Since the start of the US recession in December 2007, per the National Bureau of Economic Research (NBER), the unemployment rate has climbed from 4.9 percent up to 7.6 percent in January 2009 while personal consumption has slowed from 1 percent in Q4 2007 down to -4.3 percent in Q4 2008. To find out how the US dollar may respond to this news, check out our NFP Outlook, keeping in mind that the Japanese yen will likely respond in a similar manner since the news should have an impact on overall risk trends.

British Pound Ends Day Lower as BOE Cuts Rates to 0.50%, Pursues Quantitative Easing

The British pound ended the day down slightly against the US dollar on Thursday, though the pair remains above key support at 1.40. GBP/USD initially fell sharply on news that the Bank of England cut rates in line with expectations by 50 basis points to a record low of 0.50 percent. The BOE suggested that they would hold a neutral stance going forward as their policy statement said that “a very low level of Bank Rate could have counter-productive effects on the operation of some financial markets and on the lending capacity of the banking system,” and while this provided some bullish potential for the UK’s currency, news that the BOE was about to pursue quantitative easing had the opposite effect. Indeed, the Monetary Policy Committee (MPC) decided to start purchasing assets worth 75 billion pounds, which would be financed by the issuance of central bank reserves. According to the policy statement, “Part of that sum would finance the Bank of England’s programme of private sector asset purchases through the Asset Purchase Facility, intended to improve the functioning of corporate credit markets. But in order to meet the Committee’s objective of total purchases of 75 billion pounds, the Bank would also buy medium- and long-maturity conventional gilts in the secondary market. It is likely that the majority of the overall purchases by value over the next three months will be of gilts.” Ultimately, this has bearish implications for the British pound because it will bring down medium and long-term interest rates, but traders should also consider that because risk trends remain the primary driver of price action in the forex markets, a resurgence in risk appetite could lift GBP/USD.

Euro Down as ECB Cuts Rates to 1.5%, Leaves Door Open to Further Reductions and ‘Non-Standard’ Measures

The euro remains under pressure on Thursday after the European Central Bank cut interest rates in line with expectations by 50 basis points to 1.50 percent at 7:45 ET. Furthermore, when you take into consideration the content of ECB President Jean-Claude Trichet’s subsequent comments at 8:30 ET, the outlook for the euro looks increasingly bearish from an interest rate expectation perspective. The ECB staff’s macroeconomic projections were revised down sharply from December and showed that they expect annual real GDP growth in the Euro-zone to fall within a range of -3.2 percent to -2.2 percent in 2009, but then pick up slightly to between -0.7 percent and +0.7 percent in 2010. Meanwhile, inflation projections were also revised down to reflect forecasts for annual HICP inflation to slow to between 0.1 percent and 0.7 percent in 2009, and rise slightly to between 0.6 percent and 1.4 percent in 2010. During the Q&A session, Trichet refused to call 1.50 percent the floor for interest rates, suggesting the ECB may cut rates further, but also indicated that he saw zero interest rates as being "inappropriate." The big question here was Trichet's allusion to the potential for quantitative easing, which he preferred to call “credit easing,” as he said that the central bank was studying "additional non-standard measures." Given the prospect of not only rate cuts from a traditional monetary policy perspective but also lower yields on government bonds in the Euro-zone presents potential for further euro declines. In the end, a region of support for EUR/USD between 1.2330 - 1.2500 serves as a make-or-break level for the pair, and traders should watch that carefully in light of the ECB’s dovish bias.

Terri Belkas is a Currency Strategist at FXCM.