US Dollar Down as US NFPs Plunge 651K, But Don’t Write Off Impact of Risk Trends

The US dollar pulled back sharply during European trading, but subsequently edged higher on flight-to-quality following news that US non-farm payrolls fell in line with expectations by 651,000 in February. The results actually reflect a surprising, but very slight improvement from the previous two months due to revisions. Indeed, the January results were revised down to -655,000 from -598,000 while the December results were revised down to -681,000 from -524,000, marking the single worst monthly drop since October 1949. Job losses could be seen across the board in the manufacturing, retail, financial, business services, and hospitality sectors, while the only two to show gains were education/health at +26,000 and government at +9,000. Meanwhile, the US unemployment rate jumped more than anticipated to 8.1 percent - the highest since December 1983 - from 7.6 percent. Perhaps a more important gauge, though, is the augmented unemployment rate, which includes jobless people who aren't counted among the officially unemployed because they haven't searched for work lately, but who would take a job if offered one. This rate rose to 11.3 percent from 10.8 percent. At the same time, average hourly earnings for the month of February edged up 0.2 percent, but the annual rate of growth slumped down to 3.6 percent from 3.8 percent.

Ultimately, 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 steadily climbed from 4.9 percent while personal consumption has slowed from 1 percent in Q4 2007 down to -4.3 percent in Q4 2008, and this is likely to remain the trend through much of 2009.

From a technical perspective, the US dollar index remains above the rising trendline that has support price since the end of 2008, and unless we see a break below that point, traders should consider the possibility that the greenback retains bullish potential. Volatility should remain pretty high over the next week as a variety of indicators provide high levels of event risk for the commodity dollars in particular. For the US dollar itself, the Commerce Department is forecasted to report that US retail sales fell negative for the seventh time in the past eight months in February, as deteriorating labor markets, tight credit conditions, and a year-long recession weigh heavy on the minds of consumers. More specifically, advance retail sales are anticipated to have contracted 0.5 percent during the month, and excluding auto sales are expected to have slumped 0.2 percent, marking what may end up being a consistent trend through the first half of 2009. As we saw with US non-farm payrolls, the impact of a disappointing result may be mixed, as the Federal Reserve has already cut the fed funds target to a record low range of 0.0 percent - 0.25 percent and has no room to cut further.

Euro Slightly Stronger Versus British Pound One Day After Key ECB, BOE Rate Cuts

Both the euro and the British pound faced 50 basis point rate cuts on Thursday, but the former been marginally stronger than the latter. This suggests that the interest rate outlook may be in favor of higher yields in the Euro-zone than in the UK, which makes sense when you consider that the European Central Bank’s benchmark rate it now at 1.50 percent while the Bank of England’s benchmark rate is now at 0.50 percent. Parsing yesterday’s news for additional evidence, it’s clear that both central banks want to avoid cutting rates to zero, the obvious difference is quantitative easing. The UK has already said that they would pursue it with purchases of medium and long-maturity conventional gilts in the secondary market worth 75 billion pounds. However, while ECB President Jean-Claude Trichet said that the central bank was studying "additional non-standard measures," the ECB will have a much more difficult time embarking on quantitative easing, or as Trichet prefers to call it, “credit easing.” This is because there is no central Treasury for the Euro-zone, and thus, it will take substantial coordination to achieve the same actions. In the long-term, downside risks linger for the euro and British pound against the greenback, but when it comes to the euro against the British pound, the former may prove to hold up a bit better.

New Zealand Dollar, Australian Dollar Hold Above Support - Watch for RBNZ Rate Cut Next Week

The New Zealand dollar and Australian dollar have both managed to hold above major support levels, with 0.5000 a key level for NZD/USD while 0.6300 provides important support for AUD/USD. Where the pairs go from there may hinge upon two economic indicators next week. According to a Bloomberg News poll of economists, the Reserve Bank of New Zealand (RBNZ) is forecasted to cut rates by 75 basis points to 2.75 percent on March 11 at 16:00 ET. Meanwhile, Credit Suisse overnight index swaps are pricing in at least a 50 basis point cut, but are also pricing in a 56 percent chance of a 75 basis point reduction. Based on the RBNZ’s policy statement from January, the central bank is still open to making monetary policy more accommodative, but they will not seek to implement the same aggressive cuts they’ve applied in the past as they said that they would “expect any further reductions to be smaller than those seen recently.” With growth still slowing, the financial markets not yet stable, and inflation pressures receding, the odds are in favor of a 75 basis point cut at 16:00 ET on Wednesday. However, the outlook for the New Zealand dollar will hinge upon their policy statement, as indications that they are open to further cuts could weigh on the currency. However, if the RBNZ suggests in their policy statement that they will leave monetary policy unchanged going forward, the New Zealand dollar could actually rally.

The Australian labor markets started to deteriorate during the second half of 2008, and this is likely to continue through 2009. Indeed, the February unemployment rate is forecasted to rise to a nearly three-year high of 5.0 percent from 4.8 percent, while the net employment change is anticipated to fall by 20,000. The latter report tends to have a greater impact on the Aussie since the figure rarely meets expectations and can lead to volatile short-term price action for the Australian dollar immediately following the news at 20:30 EDT.

Terri Belkas is a Currency Strategist at FXCM.