The U.S. dollar performed extremely well during the first week of 2011 thanks to stronger service and manufacturing activity and the hope that December non-farm payrolls would be strong. Unfortunately investors were sorely disappointed by the Friday's release, which showed the U.S. economy only adding 103,000 jobs last month. With the consensus forecast at 150,000 and the whisper number ranging from 300,000 to 500,000 only a handful of traders expected such weak job growth and as a result, the dollar gave back some gains.
The softer employment report created uncertainty in the forex market, making everyone realize that buying dollars is not a one-way trade. Retail sales are due for release this week and the prospect of softer consumer spending could weigh on the dollar.
Where are the Jobs?
Throughout the past year, the missing ingredient in the U.S. recovery has been jobs. As the U.S. economy stabilized, American companies stopped cutting workers but the main problem is that there has been little hiring. Before the Federal Reserve can even consider raising interest rates, the unemployment rate needs to fall below nine percent and even with the latest decline, we are long way from that point.
What's Next?
Life after non-farm payrolls may not be so bright if the reports from retailers are accurate. The holiday shopping season was supposed to be very strong but approximately half of the retailers reporting last week missed expectations. This does not bode well for the New Year especially with the profit margins of retailers being squeezed by higher commodity prices.
Fed's Conundrum
There are still too many uncertainties out there to convince the Fed to tighten before the end of the year and the prospect of weaker retail sales could cause the dollar to give back its gains as investors take profits. In the December FOMC minutes, the Federal Reserve reminded us that their dual mandate is maximum employment and price stability. Maximum employment is a very high bar that will take a long time to meet which means the Federal Reserve is still not thinking about normalizing, let alone tightening monetary policy.
Aside from the retail sales report, the trade balance, industrial production, consumer confidence and inflation numbers are also scheduled for release from the U.S. along with the Federal Reserve’s beige book report. Continued strength in U.S. economic data could help the dollar sustain its gains, but any weakness could lead to additional profit taking.
Beyond U.S. Borders
Outside of the U.S., it will also be a busy week down under. You may have heard that Australia is fighting a massive flood in Queensland, the country’s coal belt. The impact of the floods on the Australian economy has caused the Australian dollar to fall significantly along with expectations for tightening by the Reserve Bank this year.
Last week’s economic reports were also disappointing with service and manufacturing activity slowing. Should this week’s retail sales, trade and employment numbers also fall short of expectations, the Australian dollar could extend its slide. The Aussie was one of the darlings of the currency markets throughout 2010 and even though we believe that the Australian dollar will regain its legs this year, the near term shock from the flood appears to be too much for the Australian dollar to handle.
The Chart: AUD/USD
The Australian dollar / U.S. dollar currency pair is our chart of the week. See Figure 1, courtesy of GFT Dealbook. After hitting a record high on New Year’s Eve, the AUD/USD has lost more than three cents. If the currency falls below the 50-day simple moving average (SMA) at 0.9920, then the next area of support will be around 0.9735, where we have the 100-day SMA and the 23.6% Fibonacci retracement of the May to December rally. Should the AUD/USD start to recover, it will find resistance at parity (1.0), which is a former support turned resistance.
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