USD Rallies as Job Losses Ease

The dollar continued to rally from its oversold position on Friday after US job losses slowed to a less-thanexpected 345K, the smallest decline in eight months. US yields rose to the highest level since last fall, which pressured stocks that closed mostly lower. The S&P 500 fell 2.37 points to 940.09. Today the greenback benefited from new signs the US recession is abating, which had not been the norm recently when the dollar only benefited from safe-haven demand. Rising rates and better economic conditions should normally support a currency, so this may be a return to more normal relationship in the currency market. The euro fell and closed below 1.40. Sterling dropped for a third day as UK Prime Minister Gordon Brown reshuffled his government and ignored calls for his resignation. Rising interest rates pressured commodity prices and the commodity currencies. The Canadian dollar fell on higher-than-expected Canada's job losses. The Australian dollar closed below $0.80.

The USD/JPY was above the 200-day moving average and the short-term downtrend. Improved risk sentiment and widening interest rate spreads are increasing carry-trade demand, where investors finance higher yielding assets by Japanese low interest rate loans. There are resistance in the 99 area and support in the 94. We are long the pair as it will possibly move higher.

Financial and Economic News and Comments

US & Canada

US nonfarm payrolls declined 345,000 in May, the smallest drop since September 2008 and substantially better than the consensus-expected 520,000 decrease, following a revised 504,000 loss in April, data from the Labor Department showed. Revisions to March and April added 82,000 jobs. Manufacturing payrolls dropped 156,000 in May. Although May nonfarm payrolls fell in most major sectors, the pace of the declines eased considerably. Construction payrolls fell 59,000 in May, the smallest decline since September. Retail trade went from losing an average of 64,000 per month to only 17,500 in May, while leisure and hospitality businesses added 3,000. Temporary employment, a leading indicator, was down only 6,500, its best performance in many months, signaling better employment prospects. Education and health care added 44,000 jobs, the most in six months. Partly due to an increase in the labor force, the unemployment rate rose more than expected to 9.4% in May, the highest level since August 1983, from 8.9% in April. Average hourly earnings increased 0.1% m/m to $18.54 in May, up 3.1% y/y. Average weekly hours declined to 33.1 from April's 33.2. Overall, May job figures indicate the US recession is abating, signaling an economic recovery is in sight.

Canada's employment fell a more-than-expected 41,800 in May, the sixth decline in seven months led by further manufacturing losses in Ontario, after increasing 35,900 in April, figures from Statistics Canada showed. The unemployment rate rose more than expected to an 11-year high of 8.4% from April's 8.0%.

US consumer credit fell a more-than-expected $15.7 billion in April, the second-most on record, after dropping a record $16.6 billion in March, data from the Federal Reserve showed.

Europe

UK PPI output was up 0.4% m/m in May, as forecast, partly reflecting increases in petroleum-product prices, following a 0.7% m/m advance in April, according to data from the Office for National Statistics. May PPI output was down 0.3% y/y, the first decline since 2002. Core PPI output rose 1.2% y/y, as forecast. PPI input increased 0.4% m/m in May but fell 9.4% y/y, the largest decline since 2001.

Switzerland's consumer prices in May increased 0.2% m/m, as forecast, after rising 0.9% m/m in April, according to CPI data from the Swiss Federal Statistical Office. The May CPI fell 1.0% y/y, following April's 0.3% y/y decline.

Asia-Pacific

Australia's construction sector contracted at a slower pace in May, with the AiG-HIA performance of construction index rising to 46.9 from April's 36.5, the Australian Industry Group and the Housing Industry Association reported.

Australia's official reserve assets increased to A$52.228 billion ($41.323 billion) in May from A$51.359 billion in April, the Reserve Bank of Australia reported.

South Korea's GDP grew 0.1% q/q in Q1 2009, matching initially estimated, following a 5.1% q/q contraction in Q4 2008, the Bank of Korea said. The Q1 GDP shrank 4.2% y/y, less than a previously reported 4.3% y/y contraction.

FX Strategy Update

Hans Nilsson
Capital Market Services, L.L.C.
www.cmsfx.com

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