US non-farm payrolls rose 274,000 in April from a revised 146,000 reading in March, while the unemployment rate held at 5.2% and average hourly earnings grew by another 0.3% from. The April report followed an aggregate upward revision of 93,000 jobs in February and March. The unemployment rate remained unchanged at 5.2%.

Services Growth Strong and broad-based

Employment payrolls in services industries added 229K jobs in April, nearly a 100% increase over the March figure. The recovery was broad-based, stemming from a 36K rise in professional & business services, a 35K rise in education & health jobs and a 24.4K rise in retail industries. There was also a strong 58K increase in leisure and hospitality, 60% of which was in food services and drinking establishments. The 5K loss of jobs in air transportation was well offset by other transportation jobs and retail trade.

Manufacturing still in the red

Manufacturing industries shed 6K jobs in April, showing a contraction in 8 out of the last 12 months. Interestingly, manufacturing jobs have generally continued to fall regardless of the monthly showing in services. Whether the stabilization in layoffs could signify an increase in subsequent months partially depend on the interaction of higher interest rates and rising fuel costs constraining manufacturers. Accumulation of cash balances have been widely documented to be allocated for debt repayment and mergers, with stark evidence used for hiring.

274K jobs in a soft patch?

The interesting aspect about the April employment report is that it is inconsistent with the rest of the economic data for the month, the majority of which showed a decline or a slowdown, with the exception of the existing and new home sales, which were March figures. Construction spending has also hit a record high in March. But If the March and some of the April data represented a soft patch, then the remainder of April figures (durables, factory orders, construction spending, home sales, and industrial output) will be required before drawing a conclusion about the durability of the soft patch. The chart below shows an increasing possibility of a cyclical peak in job creation, despite a spike in the 3-month average. With 21% of the April payroll creation stemming from leisure and hospitality jobs, we wonder about the durability of these sectors.

Solely by looking at the chart, one could easily conclude that interest rates have considerable upside remaining, especially that rates are less than half way from their 2000 peak. But the realities of higher oil prices, increased household and corporate leverage as well as lower stock valuations could suggest that the “neutral” level of short-term rates may be under historical levels—as was indicated by Fed Board Governor Ben Bernanke in February.

Looking ahead, we should draw attention to the possibility that Q2 earnings season may lack the strong results of Q1 particularly since oil prices hit record highs of $57 per barrel. Will the Fed attempt in raising interest rates in August, at a time of a moribund Q2 earnings season? Will oil prices sustain their above $50 levels? Many have attributed the retreat in oil prices to the “magic handshake” between pres Bush and Saudi Arabia’s King Abdullah implying Saudi’s willingness to pump put oil production. Yet there exists the greater possibilities that oil prices have receded due to the slowing growth in the US and Europe, as well downgraded forecasts by the OECD, IMF and the World Bank.



The resulting dollar rally was highlighted by dragging the euro towards 20 pips below its 200 day moving average. But as the chart shows, a more durable break of at least 30-40 pips below the average is required to signal bearishness in the pair. More ideally, we view $1.27 as the more fundamental foundation for the euro, which is also just under the 50% retrenchment of the 1.0761-1.3664 rally. But it’s also worth mentioning that general dollar sentiment remained relatively modest in the face of the report given the break in the US dollar against the CAD below its 200 day MA. Indeed, Canada’s job report did show an increase jobs that was 75% greater than expectations of a 17K rise. But as we have seen in the past, US payrolls have always superceded their Canadian counterpart as far as impact is concerned.

We stick with our post FOMC meeting-assessment postulating more hesitancy in dollar optimism in light of increased ambivalence with respect to the upside potential for US interest rates. There is a 75% chance that US rates will peak at 3.25% in June, with a 25% of them ending the year at 3.5%. Accordingly, EURUSD should remain underpinned at 1.2820 and 1.2766. Our month end target remains at 1.30, followed by 1.32 for July and 1.35 in October. Similarly, USDJPY is seen at 105.50, 106 and 104.

7:00 am Canada April Change in Employment (exp 17K, prev 4.4K), Canada April Unemployment Rate (exp 6.9%, prev 6.9%) 8:30 am US April Change in Nonfarm payrolls (exp 100K, prev 110K), US April Unemployment Rate (exp 5.2%, prev 5.2%) US April Average Hourly Earnings (exp 0.2%, prev 0.3%) 8:35 am Bank of Canada Governor Speaks.

Markets brace for this morning’s release of the US non-farm payrolls, which we expect to show an increase of 95K-100K jobs rise in April, compared to consensus estimates of a 175K rise and 110K in March. Our rationale for the forecast is founded on the poor showing in the manufacturing ISM’s employment index, falling to a 14-month low in April and the 2-month consecutive decline in the manufacturing ISM’s employment index. These diffusion indices suggest further slowing in the trend of payrolls. Traders will also scrutinize the average hourly earnings, which are expected to slip to 0.2% from 0.3%. We also expect the March retreat in services payrolls below 100K and the renewed shedding of manufacturing jobs in to extend to April at a time when all indicators have indicated a slowdown in economic activity.

A payrolls figure of less than 120K coupled with an average hourly earnings growth of less than 0.3% should be dollar negative suggesting low inflation and cooler economic activity. The unemployment rate could edge down to 5.1% if payrolls come in between around the 100K-130K range.

Sterling drops as Blair wins with reduced majority

Cable is losing more than half a cent to $1.9010 after UK Prime Minister Tony Blair's Labor Party won yesterday's UK election with a margin of victory reduced to 66 seats from 161 seats five years ago. Blair’s eroding majority is seen posing political difficulties especially as his Party attempts in passing legislation.

Sterling drifts around just above the $1.90 figure, at the 38% retracement of the $1.9214-1.8884 decline. A drop below $1.90 sees interim support at the 100 MA of $1.8950. Key foundation stands at $1.89. A US payrolls report of less than 120K could see cable boosted past the $1.9090—the 61.8% retracement of the said move. Key resistance remains at $1.9120.

Aussie steadies after post RBA retreat

Aussie is gradually regaining the 78 cent figure after losing modest ground following the Reserve Bank of Australia’s decision to hold rates unchanged for the second consecutive month at 5.50%. The RBA said in its statement that the March rate hike:” is starting to have a dampening influence on demand” and that: “The December quarter national accounts continued the pattern of previous quarters, showing weak growth in GDP alongside above-trend growth in domestic demand”. But the central bank did leave the door open for possible tightening down the road stating: “Based on previous cyclical experience, it would be surprising if interest rates did not have to increase further at some stage of the current expansion.”

It would take another disappointing payrolls report from the US for Aussie to break its downward channel on the hourly chart. A figure below 120K should boost Aussie past 78.25 cents, with subsequent pressure emerging at 78.40. A break below than 77.75 cents, sees key support at the 100-day MA of 77.55 cents, followed by the 77.20 low. Upside seen capped at

Euro requires another US payrolls disappointment

Euro bulls seek another disappointing non-farm payrolls report for an essential source of impetus following this week’s Fed statement expressing the US soft patch. Increased doubts over the continuity of US rate hikes due to growth concerns and systemic risks in US markets have started to underpin the single currency at the 200-day MA.

We see the euro’s upside testing the $1.2984resistance--which is the 61.8% retracement of the decline from the $1.3123 high to the $1.2828 low. This follows upside pressure at $1.3030. We do not think that a surprisingly strong US payrolls--such as above 250K--would increase chances of more aggressive Fed tightening, thus we see euro support initially tempered at $1.29 and 1.2850.

Yen pauses for breather

The yen rally has somewhat receded as the dollar edged up to the 104.60s after Japanese markets reopened a lightly traded session following the week-long Golden Holiday in Japan. But the pair remains on its way to its 4th week in a row for the first time since November. A report from China’s Finance Ministry saying growth remains too strong has not dented the dollar/yen rate.

USDJPY sees interim resistance at 105, followed by 105.30. We expect the dollar’s downward bias to call up support at 104.40--the 61.8% retracement of the 101.66-108.86 move, followed by 103.70.

USDCAD eyes falling 100 day MA

It would be CAD’s chance to drag USD past the 200 day MA of 1.2430 if Canada’s employment does show a rise of at least 15K jobs and its US counterpart shows a soft 110K or less. But a positive US surprise (above 200K) could boost USD towards 1.2490 and 1.2530. A drop below the 200-day MA of 1.2430, is seen stabilizing at 1.2379—the 38% retracement of the 1.1976-1.2633 move.

The dollar was little changed as traders were reluctant to take new positions ahead of Friday’s April jobs report. One day after the US Treasury said it will consider resorting towards issuing 30-year bonds to meet its finance obligations, credit rating agency Standard & Poor's downgraded the credit rating of General Motors Corp.'s and Ford Motor to "junk", as these struggle with global competition and rising health care costs.

The GM downgrade could trigger turmoil throughout the corporate bond market especially as asset managers and hedge funds are ineligible to hold junk bonds (below investment grade) could be forced to sell billions of dollars of GM debt. Although Moody's Investors Service and Fitch Ratings, the two other major ratings agencies, maintain barely investment-grade ratings on Ford and GM, they are likely tot follow in S&P;'s footsteps.

Both 2 and 10 year treasuries rallied on the news, with the 2-year yield dropping to 3.56% from 3.61% and the 10—year down to 4.14% from 4.19%.

On the data front, US productivity rose an annual 2.6% in Q1, its fastest pace in 3 quarters following a 2.1% rise in Q4 2004. The news occurred despite a 2.2% rise in unit labor costs resulting from higher compensation.

US jobless claims rose by 11K to 333K last week, with the 4-average dropping to 321.5K.

We see tomorrow’s release of the non-farm payrolls showing a 95K-100K rise in April, compared to consensus estimates of a 175K rise. The decline in the manufacturing ISM’s employment index to a 14-month low in April and the 2-month consecutive decline in the manufacturing ISM’s employment index indicate further slowing in the trend of payrolls. Especially important shall be the average hourly earnings, which is expected to slip to 0.2% from 0.3%. SEE OUR FRIDAY MORNING FOR FX IMPACT

Aussie awaits RBA decision

Awaiting this evening’s decision from the Reserve Bank of Australia, Aussie consolidates around the 78 cent level. We expect the RBA to leave rates unchanged at 5.50%, which could pressure the pair down to 77.75-80.

Overnight, data showed Australia's trade deficit widened to A$2.67 billion in March from a revised deficit of A$2.24 billion in February. The report came in worse than expectations of A$2.10 billion.

A break below than 77.75 cents, sees key support at the 100-day MA of 77.55 cents, followed by the 77.20 low. Upside seen capped at 78.25 cents, with subsequent pressure at 78.40.

Sterling little changed on Labor’s win

An BBC/ITV exit poll show Britain’s Labor Party has won a historic third term, albeit at a much reduced majority. The polls estimate PM Blair's majority to have fallen from 160 to 66 seats. If confirmed, sterling could sustain downward pressure to no lower than $1.8980.
UK services PMI fell to 56.5 last month from 57.0 in March, matching expectations, but remaining in expansion territory (above 50) for the 25th straight month. The report follows the release of the manufacturing PMI, which contracted for the first time in almost two years.
A drop below $1.90 sees interim support at the 100 MA of $1.8955. Key foundation stands at $1.89. Interim resistance found at $1.9050—the 50% retracement of the $1.9214-1.8884 decline. Subsequent bids follow at $1.9088.

Euro retains gains

EURUSD still faces resistance at $1.2984, which is the 61.8% retracement of the decline from the $1.3123 high to the $1.2828 low. Key upside pressure seen capping at $1.3050. 1.2900 acts as the interim support at 38% retracement of the said move, with $1.2830 as the underpinning foundation.

Yen eyed as Japan returns to work

Traders could see emerging volatility and emerging bids in the dollar as players return from their week-long Golden Holiday in Japan. The pair, which is on its way of dragging the dollar for the 4th week in a row for the first time since November, could overturn towards the 105 figure amid dampening of any speculation regarding a yuan revaluation.

Support seen at 104.40--the 61.8% retracement of the 101.66-108.86 move, followed by 103.70. Interim resistance starts at 105.30, followed by 105.60—the trend line support extending from the 101.66 low through the 103.64 low. Recall that China's Finance Minister Indicated the difficulty of yuan reform due to current speculation allayed expectations of any revaluation announcement at end of the week.

USDCAD drifts nears 200 day MA

Canada’s Ivey Purchasing Managers Index rose to 58.3 last month from 63.7, reflecting an improvement in the both services and manufacturing sectors. The Ivey’s employment index rose to 58.7, from 57.6, auguring well for Friday’s release of Canada’s employment report, which is expected to show the creation of more than 17K jobs last month following the 4.4K rise.

USDCAD nears its 200-day MA of 1.2430, with key support emerging at 1.2379—the 38% retracement of the 1.1976-1.2633 move. Upside seen capped at 1.2490 and 1.2530.

4:30 am UK Apr Services PMI (exp 56.5, prev 57.0), 8:30 am US Q1 adv Productivity y/y (exp 2.3%, prev 2.1%) US Weekly Jobless Claims (exp 320K, prev 320K). 9:15 am Chicago Fed President Moscow Speaks. 9:30 am Fed Chairman Greenspan Speaks. 10:00 am Canada Apr Ivey PMI (exp 58.5, prev 63.7) 9:30 pm RBA Interest Rate Decision (exp 5.50%, prev 5.50%)

Traders turn to a this morning’s UK services PMI and US productivity for useful clues on inflation and output in both countries, before considering Friday’s non-farm payrolls report in the US. The impact of the UK general election on sterling will depend on Labor’s margin of victory, with the upside seen capped at just under $1.91.

Sterling turns to services PMI, election

Aside from the results of the General expected to show another Labor victory, sterling traders this morning’s services PMI expected to have slipped to 56.5 in April from 57.0. Recall that the March services PMI rose to 57.0 from 55.1 in February, growing for the 24th straight month, and at a much stronger pace than in prior months. The services sector continues outpacing the manufacturing sector whose PMI contracted last month for the first time in almost two years, when it fell to 49.5. On Tuesday, the Confederation of British Industry showed retail sales volumes fell to a 13-year low as the index fell to -14 from -9 a month earlier.

Meanwhile, we see the pair testing initial support at 1.8828, followed by 1.8850. Key foundation stands at the 7-month old trend line support extending from the 1.7750 low through the 1.8592. Cable sees interim resistance at $1.9050—the 50% retracement of the $1.9214-1.8884 decline. A stronger than expected showing by the Labor Party in Thursday’s election could see the cable hitting $1.9088. Support starts at the 100 MA of $1.8955 and 1.89.

Euro retains gains

Euro retraces more than half of the declines of the last 2 weeks, hovering at $1.2950. Traders will await this morning’s jobless claims from the US, which has shown larger than expected declines in the past weeks, making up for the decline in the employment indices in the April ISMs. A report from International Business Machines saying it will cut as many as 13,000 jobs, mainly in Europe, has not weighed on the currency, but could dampen sentiment down the road in the already unemployed ridden region.

EURUSD faces resistance at $1.2984, which is the 61.8% retarcement of the decline from the $1.3123 high to the $1.2828 low. Key resistance seen capped at 1.3050. 1.2900 acts as the interim support at 38% retracement of the said move, with $1.2830 as the underpinning foundation.

Yen holds dollar at 104.40

The yen is on its way of dragging the dollar for the 4th week in a row, a pattern not seen since November as speculation of a yuan revaluation remains in the back of traders’ minds ahead of the end of the Labor Holiday.

Key support stands at 104.40--the 61.8% retracement of the 101.66-108.86 move, followed by 103.70. Interim resistance starts at 105.30, followed by 105.60—the trend line support extending from the 101.66 low through the 103.64 low. The yen’s gains occurred despite Wednesday’s remarks from China's Finance minister (just issued) indicating the difficulty of yuan reform due to current speculation allayed expectations of any revaluation announcement at end of the week.

Aussie drifts as RBA seen unchanged

Aussie recovers off its 77.70 low despite a report showing Australia's trade deficit widening to A$2.67 billion in March from a revised deficit of A$2.24 billion in February. The report came in greater than expectations of A$2.10 billion.

Selling pressure in the greenback hardly served as an encouragement to the Aussie amid weak housing Australian data, which reduced any possibilities of a Friday rate hike this week. The announcement is scheduled for Thursday evening NYT. We see the greenback’s sell-off boosting AUDUSD to no higher than 78.65. Support starts at the 100-day MA of 77.55 cents, followed by the 77.20 low. Key support stands at 76.90—61.8% retracement of the 75.03-79.86 rally.

The dollar fell across the board as traders further digested Tuesday’s FOMC rate hike, which was accompanied by a statement expressing concerns “that the solid pace of spending growth has slowed somewhat”. The Fed’s recognition of the economic slowdown accompanied with the restatement of acquiesced inflationary pressures in the long term raised possibilities of an end in the Fed’s tightening campaign in Q2. This dampens the potential for an accumulation in the dollar’s yield advantage and weighs on the currency going forward.

US Treasury considers recalling 30 years bond

An announcement from the US Treasury saying it will consider issuing 30-year Treasury bonds provided a short-lived boost to the dollar on expectations that it would push up long term yields. The announcement lies at heart of financing transition costs of privatizing social security, estimated as much as $2 trillion. An extension of the maturity is required to alleviate the problem of falling maturity of US debt. Average maturity of outstanding US debt has fallen to 54 months in 2005 from 60 months in 2003 and is forecasted by the Treasury to drop to as low as 47 months in 2009. Consequently, this raises the risk of foreign investors rolling off US Treasury the debt.

Bringing back the 30-year bond would also help stabilize the flattening of yield curve that is developing as a result of Fed tightening, economic slowing and acquiesced inflation pressures. The immediate reaction from the US Treasury's announcement boosted the dollar as higher long bond yields would benefit the US dollar's yield luster. But reopening the long term debt tap reignites one of the dollar's key structural deficiencies--the US budget deficit. These concerns could be more highlighted against the dollar once the Fed nears the end of its tightening campaign this summer.

On the data front, the US service sector showed a mild drop as measured by the ISM, at 61.7% from 63.1% in March. The Employment Index fell to 53.3 from 57.1 while the New Orders fell to 58.8 from 57.1. The second monthly decline in the employment index could augur negatively for the incoming services employment payrolls, which have shown a strong positive correlation with total payrolls.

Euro boosted by tempered rate outlook

We noted on Tuesday morning that the “Euro hopes for a worrying Fed” and that is what it took on Tuesday afternoon for the euro to accumulate a full cent rally towards the $1.2970s. Today’s ECB meeting maintained the Bank’s status quo of expecting solid steady growth in the long term while noting inflationary pressures in the short-term. ECB Chief Trichet did acknowledge the latest data were on the “downward side” but added there was no contradiction between its price stability mandate and growth and job creation.

EURUSD resistance edges up to $1.2984, the 61.8% retarcement of the decline from the $1.3123 high to the $1.2828 low. Key resistance seen capped at 1.3050. 1.2900 acts as the interim support at 38% retracement of the said move, with $1.2830 as the underpinning foundation.

USDJPY enters 4th weekly decline for first time in 6 months

Remarks from China's Finance minister (just issued) indicating the difficulty of yuan reform due to current speculation allayed expectations of any revaluation announcement at end of this week's Labor Holiday. But the statement did little in lifting the sagging dollar/yen rate, which is entering its 4-th weekly decline since November.

Shattering its 100-day MA of 105, USDJPY sees subsequent support at 104.40--the 61.8% retracement of the 101.66-108.86 move. Key support follows at 103.70. Interim resistance remains at 105.60—the trend line support extending from the 101.66 low through the 103.64 low. Upside capped at 104.90, with chances of accumulating bids seen tempering at 105.40.

Aussie uninspired before RBA

Selling pressure in the greenback hardly served as an encouragement to the Aussie amid weak housing Australian data, which reduced any possibilities of a rate hike this week. The announcement is scheduled for Thursday evening NYT. We see the greenback’s sell-off boosting AUDUSD to no higher than 78.65. Support starts at the 100-day MA of 77.55 cents, followed by the 77.20 low. Key support stands at 76.90—61.8% retracement of the 75.03-79.86 rally.

The Fed raised its fed funds rate by 25 bps to 3.00%, making the 8th rate hike in 11 months. Fed funds are now at their highest since September 2001, accumulating the dollar’s yield advantage relative to the euro to a full 100-bps.



The text above shows that the Fed has maintained its inflationary vigilance and is clearly recognizing the economic slowdown. The FOMC statement drove down the 2-10 year spreads to a fresh 4-year low of 49 bps as the 2-year yield rose to 3.67% and teh2-year drops to 4.16%. By maintaining its inflationary vigilance and recognizing the ensuing slowdown, the Fed could elicit further upside in short yields, while giving long bond traders fewer reasons to push up long yields.

We expect the ensuing slowdown to continue as was the case historically shown in the charts below. In Q1 1995 and in summer 2000, 2-10 year spreads dropped to today’s levels leading to a slowdown in GDP, a drop in employment payrolls and a fall in ISM manufacturing. We saw last week Q1 GDP slowing to 2-year lows at 3.1%. Yesterday, ISM fell to a 21-month low. We could see April payrolls at no more than 120K on Friday.