Stronger US Employment Sends Dollar Lower

Posted on | September 8, 2010 |

Looking at the forex spread betting markets over the last week, after a precarious start on Tuesday Sterling eventually managed to add half a cent over the shortened week.

A double top, formed on Wednesday and again on Monday morning, suggests sterling will not find it particularly easy to forge a recovery.

It was dogged by disappointing economic data throughout the week. None was outrageously bad but the trickle feed of mediocrity had a depressing effect on sterling. Perhaps the best figure was the four-point improvement in consumer confidence Gfk’s measure) that kicked off the week. It improved from -22 to -18.

Still negative, granted, but heading in the right direction.

Unfortunately the market was not impressed; it set more store by the dreary mortgage and personal lending numbers later on Tuesday. There was no chance that investors would be overjoyed by the pathetic 160 increase in the number of mortgages approved in July. Nor were they smitten by Nationwide’s house price index which fell again August, this time by -0.9%.

A heartening piece of news for Britain, if not for sterling itself, was the three-yearly survey of foreign exchange activity by the Bank for International Settlements (BIS). London has extended its mastery of global FX, handling 37% of all activity. It is more than double the 18% accounted for by the United States (New York and Chicago). No other country makes it into double figures. Paris and Frankfurt together do less business than Singapore.

The US PMIs were a mixed bag. Against all expectation the manufacturing index improved by nearly a point to 56.3 while the services PMI only just managed to sneak in ahead of the UK at 51.5. There was a spark of hope among the residential property data. The Case-Shiller index of metropolitan house prices inched higher by 0.3% in June. The tiny rise dragged the annual rise down from 4.6% to 4.2% but at least prices are going up. The figure for pending home sales also looked reasonable after a little judicious cherry-picking. The number of sales went up by % in July. (It fell by -20.1% in the 12 months but you can pretend not to read that bit.)

The week’s big deal was Friday employment report, particularly the change in non-farm payrolls. After -131k job losses in July analysts had predicted the loss of another -105k in August. In fact a net -54k people lost their jobs during the month and the July figure was revised upwards to -105k.

Taking the two numbers together the overall effect was a 76k improvement between forecast and outcome. Nobody is suggesting the figures were ‘good’. Even if the US economy were to add half a million jobs every month (which patently it does not) it would take nearly three years to make back the jobs and working hours that evaporated in 2008 and 2009. Nevertheless, Friday’s data were better than expected and buoyed the financial spread betting markets.

For the dollar, this was bad news. After their brief flirtation with the tactic of selling the dollar in response to bad US economic news, spread betting investors had already decided before Friday that the old ways were the best. If the US - or any other major economy - fails to meet expectations, investors go for the safe havens provided by the US dollar, the Japanese yen and, latterly, the Swiss franc. If the figures are better than expected they abandon the safe-havens to chase higher returns elsewhere. This almost Pavlovian response sent the dollar sharply lower on Friday afternoon.

UK industrial production should have risen in July and with a bit of luck the weak pound might at last be serving to narrow Britain’s trade deficit.

Thursday’s meeting of the Monetary Policy Committee (MPC) is highly unlikely to result in any change to interest rates. That does not mean investors will sit on their hands and do nothing.

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