US Dollar, Japanese Yen Mostly Lower as G7 Only Mentions Yuan Weakness, ISM Services Hits 16-Month High

Published October 5th, 2009 - 11:22 GMT

•    Australian Dollar Gaining Steam Ahead of Tuesday’s RBA Rate Decision
•    Euro Mostly Higher as Services PMI Signals Expansion for First Time Since May 2008
•    British Pound Remains Under Pressure Despite Strong UK Data

US Dollar, Japanese Yen Mostly Lower as G7 Only Mentions Yuan Weakness, ISM Services Hits 16-Month High
The US dollar and Japanese yen were mostly weaker at the start of the week as the G7 statement failed to yield biased comments on the greenback, while surprisingly strong US data helped to incite risk appetite. Indeed, comments from the G7 meeting were not so different from what we’ve seen in recent months, as the group simply said that they’ve “started to see signs of a global economic recovery and continued improvement in financial market conditions,” but that they “will keep in place our support measures until recovery is assured.” Furthermore, the G7 repeated that “excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability” and that they “welcome China’s continued commitment to move to a more flexible exchange rate.”

In US news, conditions in the services sector, which accounts for approximately 90 percent of the economy, appear to be improving as the ISM non-manufacturing index rose more than expected to a reading of 50.9 in September from 48.4. With 50 being the point of neutrality, this was the first sign of expansion in the sector since August 2008 and the highest reading since May 2008, giving credence to claims that the US emerged from recession during Q3. However, the employment component remained below 50 for the 17th straight month, suggesting that job losses continue to plague the sector.

This was already made clear on Friday, as the release of US non-farm payrolls (NFPs) was disappointing, posting at -263,000 in September, compared to forecasts for a reading of -175,000. This represented an acceleration in the pace of job losses, as NFPs dropped by a revised 201,000 in August, while the official unemployment rate rose to 9.8 percent - the highest since June 1983 - from 9.7 percent. Even worse, the U-6 measure of the unemployment rate, which includes people who have part-time jobs but are seeking full-time work, as well as discouraged people who have given up looking for work, rose to a whopping 17 percent in September from 16.8 percent. While it’s difficult to put this series into historical context given that it only started in 1994, it’s clear there’s a large proportion of consumers in the US that are suffering financially from a lack of full-time jobs. Thus, going forward, indexes like ISM non-manufacturing could show further improvements, but a continuation of the rapid ascent we’ve seen in recent month may not be feasible.

Related Article: Currency Market to Encounter Flurry of Rate Decisions from RBA, BOE, and ECB

Australian Dollar Gaining Steam Ahead of Tuesday’s RBA Rate Decision
The risk-sensitive Australian dollar was one of the strongest major currencies on Monday, second only to the New Zealand dollar, as commodities and equities gained. The currency faces big event risk tomorrow evening as the Reserve Bank of Australia (RBA) is anticipated to leave their cash rate target unchanged for the sixth straight month at 3.00 percent. As it stands, Credit Suisse Overnight Index Swaps (OIS) are pricing in a 60 percent chance of a 25 basis point rate hike during this upcoming meeting - which we think to be highly unlikely - and 175 basis points worth of hikes over the next 12 months, which is generally in line with what we’ve seen since early August. It was actually in early July when the RBA’s bias shifted from dovish to neutral, as Stevens removed a line from his statement noting that “scope remains for some further easing of monetary policy.” As long as we see these RBA statements continue to provide progressively optimistic outlooks, the markets are likely to remain in favor of large rate increases over the next year. However, this aggressive speculation in favor of hikes in the very near-term may set the stage for market disappointment, especially if the RBA strikes a decidedly neutral tone. In the end, this may be one of those events in which its best to “buy the rumor and sell the news.”

Euro Mostly Higher as Services PMI Signals Expansion for First Time Since May 2008
The euro was stronger against the Japanese yen, Swiss franc, US dollar, and British pound, but fell against the commodity dollars as FX traders opted for riskier assets. Accordingly, European data was surprisingly strong, as the purchasing managers’ index (PMI) for the Euro-zone’s services sector rose above 50 - signaling an expansion in activity - for the first time since May 2008 to 50.9 in September. The move helped push the composite PMI up to 51.1 in September from 50.4, marking the second month of expansion.  Adding to the mix, the Sentix investor confidence survey improved for the seventh month in October to -12.6, the highest since July 2008, from -14.6. On the other hand, retail sales for the region fell 0.2 percent in August, while the annual rate of consumption growth slipped 2.6 percent from the previous year. Overall, though, the composite PMI reading suggests that the Euro-zone performed fairly well during Q3, which should ultimately be reflected in GDP.

Related Article: Euro Weekly Trading Forecast

British Pound Remains Under Pressure Despite Strong UK Data
The British pound was the weakest of the majors on Monday and ended the day virtually unchanged from the US dollar. However, the purchasing managers’ index (PMI) for the UK’s services sector jumped to a 2-year high of 55.3 in September from 54.1, suggesting spending is improving despite rising unemployment. That said, an announcement made in the afternoon indicating that UK Prime Minister Gordon Brown is planning a pay freeze for government workers, including civil servants and some doctors, indicates that there are still major headwinds facing consumers in the near-term.

Related Article: British Pound Weekly Trading Forecast

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Written by: Terri Belkas, Currency Strategist for

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