BZ:FOREX: Dollar May Pull Back Regardless of US Jobs Result
Currency markets were in consolidation mode overnight, with markets licking their wounds after a brutal selloff on Wall Street and bracing for a big finish to an a tumultuous week as the closely-watched US Employment report comes across the wires. Expectations call for the economy to add a net 85,000 in July, marking the largest increase in three months, while private payrolls swell by 113,000.
Needless to say, the acute focus on the global economic outlook over recent days assigns tremendous weight to the outcome. Indeed, employment growth in the world's top consumer market is a direct reflection of future demand – both in the US and the world at large – and the outcome will be a big piece of the puzzle as traders formulate expectations for the evolution of the recovery (or lack thereof) through the end of the year.
Yesterday's breakneck US Dollar rally makes for an interesting backdrop as the numbers are released. Broadly speaking, the advance was as much a reflection of Swiss and Japanese to weaken the Franc and Yenas a reflection of familiar safe-haven demand for the greenback. Generally, a viable safe haven at times of turmoil must provide two qualities: liquidity, so funds parked there can be easily retrieved and reinvested once turmoil passes; and effective store of value, to shield investors' capital from market volatility elsewhere. The Franc and Yen fit the bill on both accounts.
Both countries have very low inflation rates, making them excellent stores of value, and both are highly liquid (especially the Yen, which after discounting the Euro because of the currency bloc's debt problems, is second only to the US Dollar on the liquidity front). The store-of-value qualities of both clearly evaporates however when their governments and central banks are overtly trying to undermine the exchange rate, leaving the greenback (newly rid of the debt ceiling crisis) as the sole standing safe haven play and making it the leading beneficiary as market confidence evaporates.
On balance, this means yesterday's US Dollar advance was as much about portfolio readjustment (out of one set of safe havens and into another) as it was about risk aversion. As such, short-term US Dollar bulls keen to protect their profits may see the USD surge as comparatively overdone and will be quick to exit long positions, unwilling to carry the risk into the weekend. With that in mind, it is possible to imagine that the greenback could pull back whether the jobs report proves better or worse than expected.
The straight-forward scenario would see the buck step back on a strong jobs reading as some of yesterday's blood-letting is undone. However, a particularly poor outcome could stoke fears that the Federal Reserve will be compelled to backstop the economy with a third stimulus effort (a so-called “QE3”), following in the footsteps of Switzerland and Japan. The Fed's rate-setting FOMC committee is set to meet next week, putting such concerns into the forefront. Perhaps tellingly, the Dollar didn't budge in Asian trade despite sharp losses across the region's stock exchanges or on S&P 500 stock index futures.
