US Dollar Ends Day Lower After NFPs Fall 663K, Japanese Yen Remains Weak

The US dollar ended the day mostly lower, while the Japanese yen was the weakest of the majors, as investors generally shrugged off US economic data. Indeed, the release of US non-farm payrolls (NFPs) was not entirely surprising, as the report showed that the US economy lost 663,000 jobs in March, which was right in line with forecasts for a drop of 660,000. Furthermore, the unemployment rose in line with expectations to a 25-year high of 8.5 percent from 8.1 percent. That said, this data is still resoundingly weak, but the lack of market reaction suggests that the US recession and hefty job losses are already priced in. Meanwhile, the Institute for Supply Management’s gauge of conditions in the non-manufacturing sector unexpectedly fell during the month of March to 40.8 from 41.6. While the business activity component rose to 44.1 from 40.2, many of the other key indices, including new orders, employment, and new export orders all fell further. Even worse, almost every component held below 50, signaling that the contraction in growth in the sector is only accelerating.

Looking ahead to next week, which will be shortened by the April 10 market holiday, there is only one big piece of event risk for the US dollar: the Federal Open Market Committee (FOMC) meeting minutes. In March, the FOMC left the fed funds target range at 0.0 percent - 0.25 percent but the big surprise was that they officially announced quantitative easing efforts. Since this information has already been revealed, the release of the minutes may not be very market-moving, but they will likely add to indications that the FOMC will leave the target unchanged throughout much of 2009 and that they will continue to use the central bank’s balance sheet in an effort to improve credit conditions. The one thing that may capture the market’s attention is the FOMC’s long-run projections for growth, unemployment, and inflation as revisions that indicate that the outlook appears to be even worse than previously anticipated could hurt risk appetite throughout the financial markets, and thus lift safe-haven currencies like the US dollar. However, if the revisions go unchanged, traders may shrug-off this once critical release.

Euro, British Pound Outlook May Hinge Upon the Bank of England’s Meeting Next Week

Following Thursday’s smaller-than-expected rate cut by the European Central Bank, the euro ended Friday marginally higher against the US dollar, but down against the British pound. Indeed, EUR/GBP has continued to test rising trendline support that dates back to October 31, 2008, as well as the 100 SMA at 0.9028, and these levels denote a proverbial “line in the sand” for the pair, as a push below would indicate a bearish break. Whether EUR/GBP makes this break lower or manages to stage a recovery may depend upon next week’s key UK release, because for the first time since the summer of 2008, the Bank of England is expected to leave rates unchanged.

Indeed, both Credit Suisse overnight index swaps and a Bloomberg News poll of economists reflect forecasts that the BOE will leave the Bank Rate at an all-time low of 0.50 percent at 7:00 ET on Thursday. A look at their March 5 policy statement shows that the BOE’s Monetary Policy Committee (MPC) expects both growth and inflation to fall lower in coming months and also announced a new 75 billion pound asset purchase program, which included the buying of medium and long-term gilts. Ultimately, how the British pound responds will likely depend on two factors: whether or not the BOE asserts that they want to avoid cutting the Bank Rate to zero, and whether or not they indicate that they want to expand their quantitative easing (QE) efforts. Signs that the BOE is open to reducing rates further or signs that they will increase their gilt purchases could weigh heavily on the British pound, while the opposite (steady rates, no QE expansion) could provide a boost to the UK’s currency, especially against the euro. This is due to the fact that the ECB has left the door open to additional rate cuts, as well as their own quantitative easing efforts.

Australian Dollar Tumbles as Markets Price in RBA Rate Cut Next Week

According to a Bloomberg News poll of economists, the Reserve Bank of Australia is anticipated to leave their cash rate target unchanged for the second straight month at 3.25 percent at 00:30 ET on Tuesday, but the Australian dollar maybe only respond to a surprise rate cut or a biased monetary policy statement. After the central bank’s last meeting, RBA Governor Alan Bollard said, “Together with the substantial fiscal initiatives, the cumulative decline in interest rates will provide significant support to domestic demand over the period ahead,” suggesting that further reductions were unnecessary. Since then, though, data has shown that Q4 GDP unexpectedly fell negative by 0.5 percent, the first decline in eight years, and while Bloomberg News is calling for no change in rates, Credit Suisse overnight index swaps are pricing in an 81 percent chance of a 25 basis point reduction. As a result, there is a risk that such a “surprise” move will lead the Australian dollar sharply lower. It will also be important to look to Bollard’s statement, as signs that the RBA may consider cutting the cash rate target again would add even more bearish pressure to the Australian dollar, while indications of a broadly neutral bias (and no rate cut) could support the currency.

Canadian Dollar Gains, But Upcoming Ivey PMI, Employment Data Could Take a Toll

The Canadian dollar was one of the stronger major currencies on Friday, as USD/CAD moved down toward support at 1.23, where there is a rising trendline connecting the October 14, 2008, January 2009 and March 2009 lows. However, the tide could turn for the Canadian dollar next week. At 10:00 ET on April 6, Canada’s Ivey Purchasing Managers’ Index (PMI) is forecasted to have risen to 46.9 in March from 45.2, which would mark the second straight increase. That said, since this gauge of conditions in the manufacturing sector is expected to remain below 50, the index will reflect a further contraction in business activity for the fifth straight month, albeit at a slower pace. Overall, this PMI release is likely to add to evidence that the decline in oil prices has taken its toll on Canadian economic growth, but the index may only impact the Canadian dollar if it rises back above 50, or if it surprisingly dives toward January’s record low of 36.1.

At 7:00 ET on April 9, the Canadian net employment change is forecasted to have fallen by 57,500 during March, marking the fifth straight month of job losses. Furthermore, the unemployment rate is anticipated to have risen to match January 2002 high of 8.8 percent from 7.7 percent. Since the employment change tends to be a very volatile release, this should have the greater 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.