The dollar index has continued to move lower once again today with equity markets climbing as risk appetite returned ahead of tomorrow’s key NFP data in the US, with Initial Jobless claims falling by 20,000 to 368,000. The fall was greater then expected, pushing claims to their lowest level since May 2008, and breaking below the key 400,000 level which many analysts see as the floor for any sustainable recovery in the US economy, longer term. As a result, equities climbed higher on the news, recovering most of the losses of the last few days, with the euro also gaining against the US dollar as ‘ risk on’ appetite returned, with the currency also helped higher by comments from Jean Claude Trichet. The trigger was apparently the phrase strong vigilence ( whatever that may mean!!) – a coded signal for an increase in rates in the short term. The technical picture for the dollar remains bleak, and now looks set to test the 75.50 region in due course.
This week’s market forecast for the non farm payroll release is for a fractional increase in the unemployment rate from 9% to 9.1% whilst simultaneously expecting the job creation number to be a positive 176k and makes me wonder whether this data has now entered the realms of doublethink. For those of you unfamiliar with this term, this refers to the ability to accept as correct two mutually contradictory beliefs.
However, before casting Orwellian aspersions onto the statisticians there may be some very simple reasons for this apparent contradiction. First, the unemployment rate is misleading as it discounts anyone who has not been actively looking for a job in the previous four weeks and is therefore no longer considered to be “unemployed”. In other words because these individuals are no longer “participating” in the labour market, they cannot be classed as unemployed. However, with the recent tentative recovery in the US economy this may have prompted many to return to the labour market thereby causing this figure to remain stuck at around 9%. The bad news is that the unemployment rate needs to get to 6% (or less) before the FED can claim any success in having delivered on one of its primary remits, namely fostering employment. In order for the unemployment rate to fall to 6% or below, the US needs to create around 6m jobs of which 125k to 150k per month are needed simply to keep up with population growth.
Ben Bernanke’s recent words ‘until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established’ are particularly apposite and tells us that interest rates will continue to remain low and likely to lead to further falls in the US dollar.