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US Dollar

The US trade deficit hit a record high in the month of January and as we predicted, the dollar barely budged. In yesterday’s daily fundamentals, we said that traders were so transfixed with the possibility of a very strong non-farm payrolls report that a good number would have a much more significant reaction than a bad number. Both imports and exports were strong and this time around, the strength in imports was not only due to energy prices but many other sectors as well. Unfortunately the trade balance will not be something that the market really turns it focus to until next week when the Treasury International Capital flow report is due for release. The widening is of course a concern that the market has been facing for years, but the degree of the concern rises and falls based upon how much foreign investment is coming into the country. For the time being however, non-farm payrolls is our number one focus. Yesterday, the Hudson employment index surged by 5 points, while today, the more closely watched Monster.com online employment index saw a similar rise. Payrolls is a very peculiar release. Over the past few years, analysts have struggled to correctly forecast the payrolls number. According to our friends at IFR Markets, “From 1992 to 1999, the market underestimated actual payroll growth 100% of the time, by an average 136k. So far in this decade, the consensus has been on the right side of the actual as many times as it has been on the left while the surprise has been trimmed to a miss of 77k.” Although the forecast is right now 210k, the whisper number is 300k. Therefore anything sub 230k will probably be seen as a disappointment. Aside from the low level of jobless claims, warm weather, increases in the employment component of the ISM survey and a decline in layoffs supports the possibility of a strong report. However the counter argument is that just because companies are not firing, doesn’t mean they are necessarily hiring. We will have to wait for tomorrow to see which side of the argument is stronger. What we do now though is that the market has really bid up dollars in anticipation, so a sub 190k number could cause a sharp and deep slide in the dollar.