Surprisingly strong claims

If the Chinese hike didn’t exhaust a surprise potential during the year-end week, yesterday’s US claims probably did. Initial claims for unemployment benefits fell to 388k – the lowest since early July of 2008. At the same time, the 4-week moving average was the lowest since end-July 2008. Should the data herald more good things from the US labor market to come next years, implication for the markets could be far reaching.

However, so far markets didn’t react – US yields remained basically unchanged and thus didn’t support the dollar which actually lost vs euro and yen. One should stay vigilant though – a similar surprise next week won’t be neglected anymore.  

Weak dollar, weaker euro

The year we are leaving behind was quite intriguing on the EURUSD as the trend seemed to change at least twice. First, we had the first (Greek) phase of the eurozone debt crisis and the euro tumbling. Then, thanks to the Fed, euro recovered substantially vs the dollar only to give back most of the gain during the Irish phase of the crisis at the end of the year.

Nevertheless, those movements hide a weakness of both currencies. Actually both the dollar and euro were among the weakest currencies last year. We composed the dollar index measuring the value of the US currency vs eight major currencies excepts the euro (yen, pound, Aussie, Loonie, Swiss franc, Hong Kong’s dollar, Korean won and Swedish krona) weighted on trade volumes (from the latest BIS OTC report). Measured by this index, the dollar lost 6,5%, gaining only vs GBP and loosing the most vs yen. Euro was even weaker. The euro index includes six major currencies (yen, pound, Swiss franc, Swedish krona, Loonie and Aussie) and shows a 12,3% decline of the euro’s value.

What will 2011 bring? If not the Fed’s exaggerated expansion, 2011 could be a year of the dollar. Improvement on the labor market, rising yields and rising hike expectations would normally lift the USD vs perhaps all the majors (especially vs JPY and AUD). However, we expect the Fed to sustain too lax policy for too long, thus limiting those gains.

In this case, euro could be among the winner. Even if the crisis is amplified in the first half of the year, it well can be quenched and a strong performance of the German economy can fuel expectations regarding interest rate hike in the second half of the year. In such case, investors might buy back the euro which now looks cheap or versus some currencies – very cheap.

Events to watch – activity to get a boost on Monday

New Year’s eve is treated differently on individual markets. We are past a very light trading in Asia and just beginning a similarly light trading day in Europe with some markets closed (Frankfurt, Milan) and some trading shorter hours (London, Paris, Central Europe). US markets operate relatively longer yet with no data in the calendar, any changes will be related to the final tinkering with the positions at the end of 2010. Thus those movements have little forecasting power. A real full-scale trading will start on Monday. A very intensive week starts with industrial activity in US and Europe (Chinese official PMI will be released on Saturday), then follows with the Fed’s minutes on Tuesday, services activity and ADP on Wednesday, Swiss CPI and claims on Thursday and culminates with payrolls on Friday.

Przemysław Kwiecień PhD, Chief Economist

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