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Please add this page to your list of favourites Daily market analysis 04-07-08 - US employment falls again Latest market news

Concerns over the US economy are likely to prevent strong dollar buying support in the short term with a period of nervous consolidation realistic

The monthly US payroll report was close to expectations with a decline of 62,000, the six consecutive decline, while the May data was revised to show a 62,000 drop for the month. The unemployment rate held at 5.5% following the sharp increase seen the previous month. The latest jobless claims data also recorded an increase to 404,000 in the latest week.

The US non-manufacturing ISM index was weaker with a decline to 48.2 in June from 51.7 the previous month as higher prices undermined confidence. The dollar initially weakened to 1.5770, but then rallied back to 1.57 on a spate of short covering ahead of the Independence Day holiday.

Unease over the US economy will tend to limit the scope for dollar gains with doubts as to whether the Fed will be able to increase interest rates. The US currency was holding around 1.5715 in early Europe on Friday with cautious activity given the US holiday.

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Liquidity levels will again be low on Friday with the risk of further erratic trading

Official comments on exchange rates will still need to be watched very closely given the threat of intervention.

10.00 AM GMT Overall strategy: International risk conditions will continue to be extremely important. There is likely to be a persistent background flight to quality which will continue to support the Japanese yen and Swiss franc, although further gains may be difficult in the very short term. Volatility levels are likely to remain high.

Euro/dollar:

Fears over the US economy will continue to increase in the short term while pressure for a further interest rate cut will persist and markets will want to attack the dollar again. A substantial amount of negative US developments have now been priced in which should offer some protection to the US currency. It is also the case that Euro-zone economic fears are liable to increase while pressure for central bank intervention will increase at levels near 1.50 while political protests against Euro strength will increase. Markets will want to attack the 1.50 level against the Euro, but there will be the risk of a further sharp corrections and there are still clear dangers in buying the Euro at levels above 1.4850 with choppy trading liable to persist. A dip below 1.4780 would increase the potential for a sharper dollar correction towards 1.4675.

The dollar found some support weaker than 1.4850 against the Euro on Thursday, but was still unable to make any significant headway as sentiment remained depressed. Confidence in the economy is continuing to deteriorate with strong expectations that the Federal Reserve will be forced to cut interest rates again to help head off more serious financial-sector stresses.

Although trading conditions were subdued surrounding Thanksgiving Day, there were sharp dollar losses in Asian trading on Friday with the dollar weakening to new lows around 1.4965 against the Euro. There will be the threat of further volatile trading as liquidity remains low with markets looking to attack key dollar support levels, but wary of potential corrections. Subsequently, the Euro weakened sharply back to near 1.4820.

ECB President Trichet stated on Thursday that he was against rapid and brutal currency moves. These comments indicate that concern over the Euro’s strength is increasing. Trichet still held back from actually describing the recent currency moves as brutal which is an important distinction and indicates reservations over actively intervening in the market. The Euro-zone growth data remained generally weak with industrial orders falling 1.6% in September which pushed annual growth to a nine-month low of 2.0%. The PMI index for the manufacturing sector rose to 52.6 in November from 51.5 previously, but there was a significant drop in the services-sector index to 53.7 from 55.8 previously while ECB member Ordonez warned that there were increased downside risks to growth.

Airbus industries also warned that the Euro strength was ‘life threatening’ which will reinforce fears over the industrial sector’s prospects. The 1.50 level against the dollar will be an important threshold for the central banks despite an unwillingness to defend specific levels.

The Euro-zone current account fell to EUR0.6bn in September from EUR4.5bn surplus the previous month, although there was no evidence of substantial credit-related capital outflows which will provide short-term Euro relief.

Yen:

The yen moves are liable to be dominated by degrees of risk aversion in the short term. There will be increasing fears over a global credit crunch and this will also increase the threat of a liquidation in carry trades. There will also be the additional risk of capital repatriation back to Japan which would intensify upward pressure on the Japanese currency. The Finance Ministry will discourage rapid yen gains, but appears to be willing to accept some yen appreciation. There is likely to be further short-term dollar selling above the 109.0 level and a potential medium-term target of 105.0, although short-term dollar support is realistic close to 107.50.

The dollar briefly pushed above the 109.0 level against the yen on Thursday, but was unable to hold the gains and weakened back towards 108.45 in subdued trade. Significantly, the yen did not weaken when European stock markets rallied and this suggests that underlying yen demand is still firm as risk aversion remains at elevated levels with an increasing threat of capital repatriation.

The yen strengthened further to highs near 107.50 on Friday, the strongest level since 2005, as the dollar came under general selling pressure, although Japanese markets were closed for a holiday before a move back to 108.0.

The attitude of senior Japanese finance officials will remain under close scrutiny in the short term. If protests against yen gains remained muted, there will be further speculation that the authorities have decided to tolerate a stronger currency. There will still be resistance to disorderly market moves and intervention may be considered as part of wider moves to stabilise markets.

Sterling:

There will be further concerns over the UK financial sector as domestic and global credit conditions continue to tighten. The potential for a December interest rate cut is continuing to increase as there will be fears over a much sharper slowdown in the economy. UK currency moves will also be influenced by wider carry trades and the net risks are for a further deterioration in global conditions which will tend to undermine Sterling. Dollar weakness will provide important short-term backing to the UK currency, but the UK currency still looks to offer poor value above the 2.07 level. Sterling will look for near-term support close to 0.72 against the Euro, but corrective recoveries are likely to be weak

Sterling found some support below 2.06 against the dollar on Thursday and pushed to highs above 2.0750 in Asian trading on Friday as the dollar dipped sharply. After a brief recovery, the UK currency is again testing support levels weaker than 0.72 against the Euro as Sterling sentiment remained generally weak. The UK currency also weakened back to 2.0650 against the dollar in volatile conditions.

The latest discount widow borrowings data recorded a further net borrowing of GBP1.1bn which took the total since the credit crunch erupted to GBP26.4bn. The vast majority of this lending is to Northern Rock and the fact that the Bank of England has been unable to stem the lending will reinforce a lack of confidence in the UK financial sector. Three-month Libor rates also edged higher again on Thursday which will maintain pressure for a cut in official rates to help protect the economy.

The revised GDP data recorded a slowdown to 0.7% from 0.8% previously while growth in the services sector also slowed slightly.

The Swiss currency has continued to attack trend-line resistance levels against the Euro around 1.6330, with the Swiss currency resisting significant selling as carry trades remain under pressure. The dollar was also unable to pull significantly away from record lows close to 1.10 and fell to a fresh low around 1.09 in Asian trading on Friday as risk aversion remained high before weakening back to 1.0980 in choppy trading.

The domestic economic data remained firm with a further increase in employment which will reinforce confidence in the economy.

Short-term franc trends will remain correlated strongly with levels of global risk aversion with underlying fears providing important support.

Australian dollar:

The Australian dollar has pushed above 0.8750 against the US currency at times, but has been unable to sustain the gains and weakened back to near 0.87 in local trading on Friday even with depressed US currency sentiment. The Australian currency is being undermined by elevated levels of risk aversion and a drop in metals prices. The election result will be watched closely over the weekend and could trigger temporary Australian dollar losses. Levels of risk aversion are still liable to dominate in the short term and a further deterioration in credit conditions would undermine the Australian currency. Volatility levels are liable to remain higher in the short term and there is still the risk of a move towards 0.85 next week.

Canadian dollar:

The Canadian dollar resisted a further test of support close to 0.99 on Thursday in subdued trading conditions, but was unable to strengthen back though the 0.98 level. The commodity prices impact will be mixed with high oil prices offset by a decline in metals prices. Domestically, there will be further speculation over an interest rate cut in early December which will tend to undermine the currency. Overall, the Canadian dollar will struggle to make much headway in the short term and there is still the threat of a renewed test of support levels beyond 0.99.

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Currency	Spot	Recommendations	Recommendations
EUR/US$	1.4825	Reduce long dollar exposures/buy Euro at 1.4050	Reduce long Euro exposures/buy dollar at 1.4900
US$/JPY	108.25	Reduce long dollar exposures/buy yen at 112.50	Reduce long yen exposures/buy dollar at 105.00
EUR/JPY	160.50	Reduce long Euro exposures/buy yen at 165.00	Reduce long yen exposures/buy Euro at 152.00
GBP/US$	2.0600	Reduce long Sterling exposures/buy dollar at 2.0800	Reduce long dollar exposures/buy Sterling at 2.0000
EUR/GBP	0.7195	Reduce long Euro exposures/buy Sterling at 0.7240	Reduce long Sterling exposures/buy Euro at 0.7050
US$/CHF	1.1010	Reduce long dollar exposures/buy franc at 1.1650	Reduce long franc exposures/buy dollar at 1.1000
AUD/US$	0.8740	Reduce long US$ exposures/buy AUD at 0.8000	Reduce long AUD exposures/buy US dollar at 0.9200
CAD/US$	0.9855	Reduce long US$ exposures/buy CAD at 1.0000	Reduce long CAD exposures/buy US dollar at 0.9250