Today’s FX View from IB:
We’re not quite sure what all the fuss is about this morning when it comes to splicing and dicing the non-farm payrolls report. A 10.2% headline national rate of unemployment – the first in 26 years grabbed attention upon the announcement and created an avalanche of currency selling in favor of the dollar by investors. And how wrong they were! The actual payroll decline of 190,000 might have been 15,000 more than analysts were primed for but it was only the second time since August 2008 that employers shed less than 200,000 jobs in a single month.
We really don’t think anything changed, in terms of likely consumption habits, on account of the fact that a double-digit rate unemployment rate has arrived. As traders realize the mistake they made by reaching for the sanctity of the dollar after the report, its fast losing any gains on the day and as we commence our report, the dollar is now lower at $1.4900 after rising to $1.4813 earlier in the day.
Let’s get this straight. October’s report revealed 15,000 more job losses than expected. So what? The revision to the September report saw a smaller change by 44,000 jobs as the earlier reported losses were contracted. On a net basis the number of jobs lost over these two months at the end of the summer was actually 29,000 less than was expected moments before the data. So any notion that the economy is having a second-round meltdown is well premature and investors fixated by the glaring headline 10.2% headline appear to be simply blinded by the light today. On the agenda next month it will be no surprise to see ongoing amelioration in the pace of job cuts and a downwards revision to today’s household survey number. That’ll do the trick of garnering a huge year end rally!
The pound regained its poise against the dollar and is now higher at $1.6593. Indeed the broad dollar index is now lower on the day as everything has turned around with one exception.
The Canadian employment report was admittedly ugly and it remains to be seen whether a loss to 93.61 U.S. cents can be undone today. We suspect that may be the case later in the day. The concern for the health of the Canadian economy came after employers shed 43,200 jobs rather than expanding positions by 10,000. Last month’s data shocked by adding workers and one could argue that on average, today’s report is a wash. But we won’t go that far and we have to once again raise the issue of whether currency strength is indeed constraining economic growth as the government and central bank suggests.
The situation in Australia, that other commodity rich nation, continues to improve. A quarterly update from the Reserve Bank overnight shows substantially stronger economic growth compared to the report in August. The RBA raised its 2009 prediction of GDP growth from 0.5% to 1.75% and boosted its 2010 reading from 2.25% to 3.25%. As one might expect the Aussie has improved to 91.76 U.S. cents today.
Now that the sticker-shock is fading the U.S. markets might be setting up for a pretty positive day. The S&P 500 index future took a 12-point dive after the employment report and is now up on the day. We continue to expect the dollar to suffer at the hands of being the worst of the bunch, while we should also note the fact that gold futures exceeded $1,100 per ounce in the aftermath of today’s data.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.