Dollar Looking for Direction

* The dollar and yen rose after US employment dropped more than expected, dampening economic recovery prospects. Stocks and commodities fell as investors sought haven in treasuries ahead of a long weekend in the US. The S&P 500 fell 26.91 points to 896.42. The European and commodity currencies declined on increased risk aversion. European Central Bank President Jean-Claude Trichet said the ECB expects a nearterm period of deflation to be “short-lived.” Trichet reiterated that the hard-hit eurozone economy will see the pace of the recession easing in the second half of 2009, with positive GDP quarterly growth resuming by mid- 2010.

* Most key currency pairs remain confined in narrow trading ranges without clear directions. Investors’ bipolar attitude toward risk, with sentiment changing from optimism to pessimism every other day, has kept the dollar index volatile but in a tight range around 80 since late-May. Today the dollar index rose to 80.26 from 79.63. The index has developed a large uneven head-and-shoulder top. If the 78-area support is broken, the index is likely to test the 72-area support.

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Financial and Economic News and Comments

US & Canada

* US nonfarm payrolls fell a more-than-expected 467,000 in June after a revised 322,000 loss in May, data from the Labor Department showed. Revisions to April and May added 8,000 to payrolls. Payrolls fell in most key sectors, with the largest drops in manufacturing (-136,000), business and professional services (-118,000), and construction (-79,000). Government payrolls also declined 52,000, due to the federal Census-related hiring pattern. Health and education jobs continued to increase (+34,000). The June unemployment rate increased less than expected to 9.5%, the highest since August 1983, from 9.4% in May. Average hourly earnings were unchanged m/m at $18.53 in June but increased 2.7% y/y. Average weekly hours declined to 33.0, the lowest level since records began in 1964, from May’s 33.1. Overall, June labor figures indicate that the US labor market, lagging behind other indicators, remains in a tough condition, while manufacturing data suggest a US economic recovery is in sight.

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* US initial jobless claims in the week ending June 27 fell 16,000 to a lower-than-expected 614,000, after the previous week’s upward revision to 630,000, according to figures from the Labor Department. The 4-week average of new jobless claims declined 2,750 to 615,250. Continuing jobless claims in the week ending June 20 dropped 53,000 to a lower-than-expected 6,702,000, following the preceding week’s upward revision to 6,755,000. The 4-week average of continuing claims decreased 13,750 to 6,751,500. The insured unemployment rate for the week ending June 20 declined to 5.0% from the prior week's upwardly revised 5.1%.

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* US factory orders rose a more-than-expected 1.2% m/m in May, the most since June 2008, after a downwardly revised 0.5% m/m increase in April, according to data from the Commerce Department. Excluding transportation, factory orders advanced 0.8% m/m. May factory orders fell 23.9% y/y.

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Europe

* Eurozone producer prices unexpectedly declined 0.2% m/m in May after an upwardly revised 0.9% m/m slide in April, PPI data from Eurostat showed. May PPI fell a more-than-anticipated 5.8% y/y, the largest fall since records began in January 1981, following April’s 4.6% y/y decrease.

* The eurozone unemployment rate rose more than expected to 9.5% in May, the highest since May 1999, from an upwardly revised 9.3% in April, according to data from Eurostat.

* The CIPS/Markit UK construction PMI unexpectedly declined to 44.5 in June from 45.9 in May, indicating contraction in UK construction-sector activity for sixteen months, according to data from Markit Economics and the Chartered Institute of Purchasing and Supply.

* The European Central Bank kept the benchmark interest rate unchanged at a record-low 1.00%, as forecast. ECB President Jean-Claude Trichet signaled the ECB will maintain rates at this level for the coming months but did not rule out the option of further rate cuts, saying “we did not decide today that this was the lowest level we would attain under any circumstances.” Regarding eurozone economic growth outlook, Trichet said “economic activity over the remainder of this year is expected to remain weak but should decline less strongly than was the case in the first quarter of 2009,” adding that “looking ahead into next year, after a phase of stabilization, a phase of recovery is expected around mid-2010.” Trichet said he expects inflation pressures to remain muted. “The fall of annual inflation rates reflects mainly temporary effects,” he said, adding that “after a return to positive rates, we expect price developments to remain dampened over the horizon.”

* Sweden’s Riksbank unexpectedly cut its key repo rate to 0.25% from 0.50% and said it expected that rate to remain that low over the coming year.

* Sedlabanki, Iceland’s central bank, left its repo rate unchanged at 12.00%.

Asia-Pacific

* Japan’s monetary base advanced a less-than-expected 6.4% y/y in June, a tenth consecutive increase, after a 7.9% y/y rise in May, according to data from the Bank of Japan.

* Australia’s trade deficit widened more than expected to A$556 million ($448 million) in May from a revised A$282 million in April, figures from the Australian Bureau of Statistics showed. Exports fell 5.0% to A$20.39 billion, the lowest since March 2008. Imports declined 4.0% m/m to A$20.95 billion.

Source: Hans Nilsson

02.07.2009