How Many Payrolls Could Affect EURUSD

Kathy Lien, Director of Currency Research, GFT
May 31, 2012





  06/20 Meeting 07/31 Meeting
NO CHANGE 64.0% 63.4%
CUT TO 0.00% 36.0% 35.3%
HIKE TO 0.50% 0.0% 1.3%



There’s nothing more important to investors right now than Europe’s sovereign debt crisis. However over the next 24 hours, U.S. non-farm payrolls will provide a much needed and hopefully welcomed distraction from Europe’s troubles. The U.S. dollar performed extremely well this month thanks primarily to deleveraging and risk aversion but better than expected U.S. economic data has also made the Federal Reserve less concerned about the need for QE3. At a time when Europe and the global financial markets are desperate for additional support from the European Central Bank, the ECB will undoubtedly be the first between the two to pull the trigger. Friday’s non-farm payrolls report may affect how the EUR/USD trades but will not alter its long term outlook unless it is abysmally weak or significantly strong. Based on the leading indicators for NFPs, job growth should have accelerated in May but we don’t have the benefit of seeing the ISM reports before this month’s release, making a prediction for payrolls more difficult. What we do know is what we have listed below which is that the four week moving average of jobless claims declined in May compared to April, continuing claims declined, companies added more workers last month according to private payroll provider ADP and consumer confidence rose to its highest level since 2007 according to the University of Michigan. Unfortunately a similar survey from the Conference Board yielded very different results. Instead of improving, the Conference Board found that confidence dropped to a 4 month low. This lack of consistency is worrisome particularly since the meltdown in equities is good reason pessimism.   Of the 85 economists surveyed by Bloomberg, all but 3 expect stronger payrolls in May compared to April. The current forecast is for the creation of 150k jobs versus 115k jobs last month and for the unemployment rate to remain unchanged. As long as payrolls are close to 150k, the U.S. dollar should rally and risk appetite will improve - the stronger the number, the stronger the recovery in risk. For the EUR/USD, this means initial weakness immediately after a stronger release followed by a possible recovery as equities respond to signs of improvement in the labor market (the typical V shaped move in EUR/USD that we regularly talk about). If fewer jobs were created last month, expect currencies and equities to weaken across the board as trouble on both sides of the Atlantic become too painful to bear. Ultimately however we do not expect a large enough deviation in non-farm payrolls to create a big reaction in the U.S. dollar. While job growth is crucial to the sustainability of the U.S. recovery, its most important role is as an input to the Federal Reserve’s monetary policy decisions. As long as payrolls stay above 100k, the Fed will not feel an increased need for more stimulus while a strong number won’t erase the need for QE3 either because that decision largely rests on the market’s reaction to the ongoing problems in Europe. 

Leading Indicators for NFPs Point to Stronger Job Growth

Here are the arguments for strong vs. weak NFPs. 

Arguments for Better Non-Farm Payrolls:

1.     4 Week Moving Average of Claims drop to 374k from 383k

2.     ADP Employment Change Increases 133k from 113k

3.     University of Michigan Consumer Sentiment Index at Highest Level Since 2007

4.     Continuing Claims Decline from April

Arguments for Weaker Non-Farm Payrolls:

1.     Challenger Reports 66.7% Increase in Layoffs

2.     Conference Board Consumer Confidence Index Drops to 4 month low


As the month of May draws to a close, we want to take this opportunity to look at how the euro has performed. It shouldn’t be a surprise that the euro is one of the worst performing major currencies this month, second only to the New Zealand dollar. Since the beginning of May, the EUR/USD lost close to 7 percent of its value, falling from a high just shy of 1.33 down to a 22 month low of 1.2335.  The euro also dropped more than 9 percent against the Japanese Yen, leaving EUR/JPY at an 11 year low. During this time, 10 year Greek bond yields soared from 20 to 30 percent. Spanish bond yields rose from 5.768 to 6.56 percent while Italian yields rose from 5.512 to 5.895 percent. Concerns about the Greece’s adherence to austerity measures, their plans to keep the euro and the sustainability of Spanish finances all contributed to the slide in the euro and the rise in bond yields. Equities suffered as well with the German DAX falling close to 8 percent this month. While the EUR/USD ended the day unchanged, we are still deep in the woods of unknown territory. How things progress in June could decide the long term fate of the euro. On June 6, the EU will release its revised forecasts for the Eurozone. On June 10th, France has Parliamentary elections. On June 14th, there is a Euro group meeting and on the 17th, Greece will hold elections. This will be followed by the G20 meeting held from June 18th to June 20th. In the near term, the EUR/USD recovered earlier losses to end the day unchanged thanks to reports from Dow Jones that the IMF has begun talks on contingency plans for Spain. The only type of contingency plan that could help Spain would involve cash and lots of it. According to the Wall Street Journal / Dow Jones, the IMF has “started discussing contingency plans for a rescue loan to Spain in the event that the country fails to find the funds needed to bail out Bankia, its third-largest bank by assets.” The mere possibility that the IMF could be preparing a rescue loan for Spain is good news for the euro given the radio silence from policymakers over the past few weeks. Today, Irish voters headed to the polls to vote on the EU Fiscal Treaty and the outcome could affect the outlook for the euro. If voters approve the Treaty, they can rest assure that the European Stability Mechanism (ESM) would be available to them if needed.  However if they reject the Treaty, they would no longer be able to access emergency bailout funds, leaving the country with more austerity as the only option in case fiscal finances worsen. Meanwhile many traders are watching EUR/CHF closely for any signs of intervention. The Swiss economy grew by 0.7 percent in the first quarter which was much stronger than expected. Unfortunately stronger growth will not prevent the Swiss National Bank from intervening in the franc to keep EUR/CHF from falling. The currency pair has been frozen at 1.20 and the only way that it can remain above this level amidst significant euro weakness is if the SNB has been quietly keeping the pair supported. 


 Despite stronger economic data, the British pound ended the North American trading session lower against the U.S. dollar and euro. Based on the GfK index which rose from -31 to -29, U.K. consumers were less pessimistic this month. While the economy is in recession and retail sales growth is weak, the prospect of the summer Olympics and the Queen’s Diamond Jubilee have brightened the mood of consumers. Yet in order for this to affect the Bank of England’s monetary policy plans, the improvement in sentiment would need to translate into stronger consumer spending. Meanwhile the housing market is also showing signs of life. After the increase in mortgage approvals reported yesterday, this morning we learned that house prices rose 0.3 percent in May according to Nationwide which is consistent with the Hometrack Housing Survey.  Home prices rose 0.7 percent in May due to the lack of new homes coming onto the market. Manufacturing PMI is scheduled for release this afternoon. Economists expect manufacturing activity to contract for the first time this year. Based on the sharp drop in the CBI Industrial Trends survey, we can’t help but agree. Manufacturing demand fell to its weakest level this year according to CBI and the outlook deteriorated sharply. Weaker manufacturing activity does not bode well for the U.K. economy which desperately needs stronger activity to rise from recession.


The Australian and New Zealand dollars rebounded against the greenback while the Canadian dollar extended its losses. The Aussie ignored weaker economic reports that showed a decline in the growth of home ownership. Australian building approvals saw a steep drop from 6.0 to -8.7 percent in the month of April. With interest rates declining, living costs and unemployment remaining stable, one of the main hazards for the economy is the poor housing performance. After cutting interest rates on May 1st, analysts expect the RBA to cut interest rates again by as much as 100bp over the next few months. The planned rate cut would entice consumers to spend which would help to lift the economy. Canada’s Current Account report was released this morning and it showed a wider deficit. The balance increased from -9.7B to -10.3B in the first quarter. This poses a threat to Canada since exports makes up a third of its economy. New Zealand Business Confidence released last night showed that it fell for the first time this year due to concern that the European crisis will slow global demand and curb exports. At 18:45 ET / 22:45 GMT New Zealand will release its Terms of Trade Index which is expected to worsen from the previous quarter. At 19:30 ET / 23:30 GMT Australia will release its AiG manufacturing PMI report. Canadian GDP is set to be released tomorrow at 8:30 ET / 12:30 GMT and growth is expected to have improved in March and the first quarter.


For the first time since mid February, USD/JPY broke below 78. This means we are heading closer to the point where verbal could turn into physical intervention. The last two times the Bank of Japan came into the foreign exchange market and sold Yen was in November when USD/JPY fell below 76 and in August when it dropped below 77.  While we may not see the BoJ in the market unless USD/JPY dips below 77, we certainly expect official rhetoric to increase. Last night, Finance Minister Azumi reminded us that the Yen’s rise does not reflect economic fundamentals. The economy remains weak, the country is running a trade deficit and the Bank of Japan is easing monetary policy. These factors should be negative for the Yen and yet the currency continues to rally because of one reason only, which is risk aversion. The Japanese yen extended its gains against all of the major currencies today. The persistent decline in U.S. Treasury yields has made the Yen more attractive compared to the dollar. According to the latest economic reports, industrial production and labor cash earnings growth slowed in April while housing starts accelerated. No major economic reports are expected from Japan over the next 24 hours but Chinese manufacturing PMI numbers will affect how all Asian currencies trade. 

USD/JPY: Currency in Play for Next 24 Hours

Our currency pair in play for the next 24 hours will be USD/JPY. Tonight at 19:50 ET / 23:50 GMT Japan will be releasing its Capital Spending data. Tomorrow at 1:00 ET / 5:00 GMT Japan will release its Vehicle Sales. At 8:30 ET / 12:30 GMT US will release its Non-farm Payrolls report and at 10:00 ET / 14:00 GMT its ISM Manufacturing, Construction Spending and Total Vehicle Sales reports.

USD/JPY is currently in a downtrend according to our Double Bollinger Bands. The first support will be at 78.19 which is today’s low. Should this break then the second support will be around 76.57 which is January 2, 3, and 16th’s low. On the upside the first resistance will be at 79.62 where our 20 day SMA lies. Should this resistance break then our next resistance will be at 80.00 where the 100 day SMA and upper first standard deviation Bollinger Bands meet and is also a psychologically significant number.