Grizzly Times for USD Bulls

hanz · Newbie Joined: Dec 30, 2004 Posts: 3

The market is clearly in the mood to sell the USD. While the December Payrolls' number was much weaker than expected, the sharp upward revision to November was ignored given interest rate expectations. As we wrote on Friday, this USD selling may continue for some time, but the longer it does the greater the chance of a correction on the view the Fed is not done quite yet.

To recap, U.S. December Non-Farm Payrolls came in at 108k, well below consensus market expectations of around 215k. However, the November number was revised up to 305k from 215k. In addition, the December unemployment rate dipped to 4.9% vs. 5.0% in November and average hourly earnings came in higher than expected at 0.3% m/m. For full-year 2005, the monthly average for patrols was 167k. This appears to confirm two things. First, the U.S. economic expansion remains very robust and this is still being reflected in the labour market. Second, there are some signs of growth deceleration.

The big question is when this deceleration is sufficient to cause the Fed to stop its tightening cycle. As of Friday's close, the Fed funds futures' implied yield peaks in June at 4.685% and thereafter ends the year at 4.65%. Our own policy call is for the Fed to hike its Fed Funds Target Rate (FFTR) two more times to 4.75% and thereafter to leave rates on hold through year-end. If we are right, USD bears face the danger at some stage of a USD correction to reflect this disparity between our expected FFTR peak and current implied rates.

It is difficult to tell when that correction may happen. The Fed itself may seek to temper "irrational exuberance" in U.S. rates' markets by reminding investors as to the possibility of further tightening.

hanz · Newbie Joined: Dec 30, 2004 Posts: 3

Investors are becoming pessimistic toward the dollar on signs the Federal Reserve is almost finished raising interest rates after 13 increases in 18 months, a Bloomberg survey indicates. Forty-four percent of the 50 traders, strategists and investors surveyed on Jan. 6 from Sydney to New York advised selling the dollar against the euro, up from 28 percent the previous week. Forty percent recommended selling the dollar versus the yen, compared with 26 percent a week earlier.

The dollar had the worst week against the euro in more than three years after minutes from the Fed's Dec. 13 meeting said future rate increases aren't likely to be "large." The U.S. currency advanced almost 15 percent last year as Treasuries yielded more than government bonds sold by Germany and Japan and the European Central Bank raised interest rates once. Fed minutes suggested central bank policy is becoming increasingly dependent on economic data. Since June 2004, policy makers raised rates by a quarter point at each meeting.

American employers added 108,000 new jobs in December, the Labor Department reported on Friday, less than any of the 62 forecasts from economists surveyed by Bloomberg.

European Central Bank council member Nout Wellink said a pickup in economic growth raises the chances of further increases in interest rates. "With given inflation expectations, with the economy getting stronger, the chance of a rate rise increases," Wellink said on a Dutch public television talk show yesterday. He declined to say when he expects the ECB to make its next move.

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