Friday’s employment report set the seal on a bad week for the Dollar but the damage was already done. The Dollar had achieved its lowest ever (nine-year) level against the Euro and touched a three-year low against the Yen. Although a brief sell-off came to nothing, the Dollar showed its vulnerability on Monday when the Purchasing Managers’ Index suggested a slowdown in the manufacturing sector. Three speeches from Federal Reserve bosses on Tuesday offered a down-beat assessment of the economy that teed up the Dollar for regular beatings during the rest of the week.
The corn-curer on Friday was the Non-Farm Payrolls figure. The monthly change in US payrolls is perhaps the most eagerly-awaited statistic in the world. Like all economic statistics, the data speak of the past; even so, hiring and firing decisions in the States are a good indicator of how individual employers see their businesses going. The 63,000 drop in February payrolls was the second successive monthly fall. The last time this happened was seven years ago when two consecutive monthly declines were followed by another straight dozen.
Enter the US cavalry. Ben Bernanke at the Federal Reserve must have had wind of the poor payrolls figure. He had managed to figure out a way to defuse – or at least diffuse – some of its negative effects. The Fed banged out a press release adding $140 billion to the size of its emergency liquidity package. The market was nonplussed. Had the Fed recognised that its rate cuts were not getting through to borrowers? Could there have been a change of policy? Was the new funding a substitute for further savage interest rate cuts? It created enough confusion to provoke a round of profit-taking on short-Dollar positions.
For once the British Pound managed to keep pace with the Euro for a whole week. This was no mean achievement when the Euro was forging new highs against the US Dollar. The UK data were not electrifying but they were better than the market has become used to seeing. Monday’s UK manufacturing PMI was the only one of three (UK, EU and US) that went up on the month. Wednesday’s services sector PMI brought another improvement and delivered the highest reading from the same trio.
More important than the economic data was Thursday’s interest rate decision from the Monetary Policy Committee. It was not a surprise that the MPC left the Bank rate at 5.25 per cent. The vast majority of forecasters had looked for exactly that outcome. Those same forecasters expect interest rates to go down two or three more times this year. But the fact that there was no cut last week surprised a sufficiently large minority to prompt a quick burst of buying when the bears covered their short positions.
Last week’s upward breakout suggests an interim target of $2.06 for Sterling. Now that the Pound is above the magic $2 level it is tempting to let short Dollar positions run and to see what happens. Buyers of the Dollar should lock into a worst-case outcome by placing a stop order for at least half their requirement. If that order is set for a level above $2 (and absent a cataclysmic downward price break) Dollar buyers can be sure of doing their trade within five per cent of the best price for 27 years.
Source Moneycorp.
