Chris Gaffney

Good day, and welcome to another week. Chuck finally made it back home last night, after speaking at two different conferences last week down in Florida. We had a pretty wicked night of thunderstorms last night, so I’m sure Chuck’s flight wasn’t exactly smooth. Sure hope he got over that stomach thing that he had on Friday.

Currency investors weren’t feeling too good either Friday, as a weak jobs number here in the U.S. was a lot like bad shrimp for nondollar investors. The traditional “safe haven” currencies of the Japanese yen (JPY) and U.S. dollar moved up Friday after U.S. payrolls added just 115,000 workers, the smallest increase in six months. As Chuck informed us all on Friday, the median estimate of economists was for a 160,000 increase. In a bit of an odd twist, the jobless rate actually fell to a three-year low of 8.1%.

Chuck sent me this note after reading about the jobs numbers last Friday:

“We sure did see a prime example of a risk-off day on Friday, with all the risk assets getting taken to the woodshed after the jobs report. You may recall me saying on Friday that in recent times, the markets had treated the jobs report outcome like it should, and that if the number of jobs created in April were weaker than forecast (they were 115,000 versus 160,000 forecast), the markets would view this as a primer for QE3, which would be dollar negative

“However, after the knee-jerk reaction to the report had the dollar on the run, the currencies’ fortunes turned on a dime, and it was back to the old trading theme of “bad data in the U.S. equals buy dollar bias.” Who knew? Would someone that has some influence over the markets tell them that investors want to know ahead of time which curtain they should choose!

“The thing that kept creeping into my mind about this whole report, and it making two consecutive reports, was that thing I’ve tried to put into your minds about the financial storm, and how we had looked pretty good for a short time, but we were in the eye of the storm. It appears to me that we’re entering the other side of the storm, and it could very well be worse than the front of the storm that hit in 2008, for we didn’t correct anything!

“Oh, and in keeping with my usual “dig deeper than journalists routine” with the jobs data, the BLS added 206,000 jobs to the 115,000 total — which, without the adjustment, job creation would have been negative!”

Back to Chris now. Thanks to Chuck for his intuitive analysis of the currency markets’ reactions to the jobs numbers.

One thing that I noticed when I was going over the jobs reports this weekend was the “participation rate,” which fell to the lowest in over 30 years. The participation rate indicates the share of working-age people who are in the labor force. This percentage fell to 63.6%, from a reading of 63.8%, last month. I highlight this number because it shows why the jobless rate can be falling in spite of lower hiring.

People who are working age are simply leaving the work force, too aggravated in their hopeless attempts to find a job. While their exit from the available work force currently has a positive impact on the unemployment rate, as the U.S. economy starts to recover, we could see these workers move back into the work force. This would have a drag on the recovery of the jobless rate, with a deluge of new workers entering the market, offsetting those leaving the unemployed ranks due to new hiring.

Investors will need to keep an eye on this participation rate in the coming months, as the Federal Reserve is certainly keying on the jobs side of the economy.

Federal Reserve Chairman Ben Bernanke said last week that the central bank is “prepared to do more” to boost the economy if it appears necessary. U.S. policymakers have repeated their plan to hold borrowing costs low through 2014 as the U.S. economy slowly recovers. “The unemployment rate has declined but remains elevated,” Fed policymakers said in an April 25 statement. The FOMC “expects economic growth to remain moderate over coming quarters, and then to pick up gradually” and “anticipates that the unemployment rate will decline gradually.”

Uncertainty regarding the elections in Europe also weighed on investor confidence on Friday, causing many of the speculators to move money back into the U.S. dollar. There were no surprises in France, as the French booted out President Nicolas Sarkozy and voted instead for Monsieur Francois Hollande, the Socialist candidate.

Chuck pointed out last week that this result was expected (Hollande even appeared on last week’s cover of The Economist magazine). But while the election results were expected, the direction he will take France is not so clear. German Chancellor Angela Merkel invited Hollande to Germany to discuss the eurozone’s growth policies.

President-elect Hollande campaigned on a ‘balanced’ approach to the euro (EUR), offsetting austerity measures favored by Germany with efforts to stimulate growth. It will be interesting to see if Hollande can be persuaded by Angela Merkel, who has mostly had her way in guiding the eurozone recovery efforts.

Even more uncertainty resulted from the other big election over the weekend. Greek voters picked anti-bailout parties, but none of these minor parties garnered enough votes to form a government straight away. New Democracy leader Antonis Samaras is trying to piece together a government, and was given three days to make it happen.

Members of the Greek government are split down the middle on whether to renege on the terms of the bailout agreements. If Samaras is not able to put together a government, the second-place winner will get three days to try, and if they can’t, then it falls to the third-place party, who will get another three days. If no government can be formed in the next nine days, President Karolos Papoulias will get a chance to broker a government of national unity, with another round of elections a possibility.

The major risk is that no government is formed and there is no one able to continue the austerity measures necessary for Greece to continue to receive the euro bailout funds. European leaders could shut the flow of funds off, fearing they are throwing good money after bad (there seems to be some truth to that statement). Eventually, we could see Greece be forced out of the euro, causing another round of fear over what will happen if one of the members exits. In my mind, it is pretty simple: The euro is much stronger without Greece, but the Greek exit probably won’t be a smooth and painless event. A report I read over the weekend agrees with my thought that a Euro ex-Greece would actually appreciate. According to the report, the euro would rise to $1.36 “the second they say Greece is out.”

Economic data out of Europe today showed German factory orders rose more than economists forecast in March as global demand helped offset a slowdown in the eurozone. Factory orders jumped 2.2% from February, topping economists’ projections of a 0.5% increase. Today’s numbers were a positive surprise following Friday’s data, which showed a euro-area composite index dropped. April’s index, based on a survey of purchasing managers in both services and manufacturing industries dropped to 46.7 from 49.1 in March. A reading below 50 indicates contraction.

Chuck spoke about the slippery slope oil was starting down on Friday morning, and it continued to lose throughout the day to close below $100 for the first time since February. The drop in crude prices was the result of the combination of poor jobs data here in the U.S. and investor worries over the elections in Europe. The commodity currencies dependent on oil sold off, with the Canadian dollar dropping for a third day in a row. The loonie lost over 1.6% vs. the dollar last week as reports indicated both the U.S. and Canadian economies would not recover as quickly as some thought. Many had predicted the Bank of Canada would be increasing rates this summer, but the probability of a rate rise by September now stands at less than half, down from two-thirds at the start of the week, according to Bloomberg.

The drop in oil prices will also weigh on the Norwegian krone (NOK), but the impact may not be as great as you may expect. A story I read yesterday showed that higher oil prices have actually helped Norway’s government hold the value of the krone down. Yes, it sounds counterintuitive, but high oil prices have actually given Norway’s leaders the ability to sell more of the Norwegian krone back into the market in an effort to hold down the krone’s value. Norway is the seventh-largest oil exporter, and the recent higher prices have caused a surge in the government’s oil revenues. Norway’s central bank is predicted to sell an average of 727 million Norwegian kroner a day for the rest of the year, up from 350 million in May. The bank has cut rates twice since December, in part to weaken the currency, and the oil revenues have given them the ability to keep a lid on the Norwegian krone.

Investors have shown an interest in the Norwegian krone in spite of the government’s efforts to cap its appreciation. Norway’s economy will expand 3.25% this year according to central bank estimates, and the unemployment rate was just 2.6% in April, Europe’s lowest level. The oil revenues have made Norway the world’s second richest nation per capita according to The Economist magazine. This has caused many to look toward Norway as a safe haven, seeking shelter from Europe’s debt crisis.

The other commodity currencies of Australia (AUD), New Zealand (NZD), South Africa (ZAR) and Brazil (BRL) all sold off as risk was taken off. As Chuck informed readers last week, the RBA surprised many in the markets with a 50 basis point rate cut. Many investors now believe the RBA will reduce its benchmark rate even further, to an all-time low after officials cut forecasts for growth and inflation. Gov. Glenn Stevens cited economic conditions that were somewhat weaker than expected as a reason for the cut. The RBA is now predicting average growth of 3% in 2012, down from a February estimate of 3.5%. Consumer prices are predicted to rise 2.5% in the year, down a bit from a previous prediction of 3%. Lower inflation expectations combined with slower growth will probably cause further rate cuts by the RBA in the coming months.

It will be a relatively slow week for data here in the U.S., with consumer credit today followed by a couple of “optimism” measures tomorrow (NFIB Small Business Optimism and IBD/TIPP Economic Optimism). Wednesday, we will get the wholesale inventories and MBA mortgage application numbers. Thursday will be the busiest day, with the weekly jobs numbers along with the trade balance, monthly budget statement and import price index. Friday will close out the week with the PPI numbers along with the University of Michigan confidence index.

To recap: It was a risk-off day on Friday after the jobs data in the U.S. came in a surprisingly weak 115,000. Bad data in the U.S. combined with uncertainty over in Europe to push investors back into the “safe havens” of the U.S. dollar and Japanese yen. French voters elected a new president from the Socialist Party, and Greek voters threw their government back into disarray. Neither is positive news for the euro, which sold off a bit. But if the Greeks exit, we could see the euro rally to $1.36. Oil fell below $100 a barrel, pushing the CAD$ down. Norway’s oil revenues have been used to keep a lid on the value of the NOK. And the commodity currencies of Aussie, kiwi and rand were all lower.

Chris Gaffney
for The Daily Reckoning

Chris Gaffney

Chris Gaffney is vice president of EverBank World Markets and the alternate author of the popular Daily Pfenning newsletter. Mr. Gaffney has been involved in the global marketplace since 1987, and is director of sales for EverBank World Markets. The Daily Pfennig is delivered via e-mail to tens of thousands of market watchers globally, providing commentary that allows them to stay on top of economic, currency, and market happenings. He is a Chartered Financial Analyst and holds degrees in accounting and finance from Washington University in St. Louis.

  • Larry Bernard

    The Euro is dying. Lets have the decency as a world to allow it to die with some form of dignity

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