Release time: Friday, December 5, 2008 — 8:30 AM EST

Experts and analysts alike agree that this Friday’s Non Farm Payroll report is expected to contain significant job reductions. The only question is how large will the declines be. New claims for unemployment have surged above 500,000 and it’s not just the large corporations retrenching. Recent data indicates that small businesses are cutting back now as well. Employment conditions are continuing to worsen and the larger declines in September and October are fueling fears that we are seeing the establishment of a new trend.

The unemployment rate is expected to increase as a result. Registering 6.1 percent in August, unemployment is expected to reach 6.7% - 6.9%, up from last month’s 6.5%. We are entering into regions that we haven’t seen since late 1994.
For week ending November 22, the Labor Department reported that the advance figure for seasonally adjusted initial claims was 529,000, a decrease of 14,000 from the previous week’s revised figure of 543,000. They also reported a four-week moving average of 518,000, an increase of 11,000 from the previous week’s revised average of 507,000.

Recent economic releases echo the U.S.’s economic stress. U.S. manufacturing saw new orders fall to the lowest since 1980, down to 27.9 in November from 32.2 in October. Readings below 50 indicate a contraction in the manufacturing sector. Pierre Ellis, senior economist with Decision Economics in New York said “(The ISM report) emphasizes the general rapid slowdown in inflation. The economy is falling more sharply and to a greater depth than earlier perceived and the effect on prices is more immediate. Price adjustments is what will ultimately bring the economy back but the immediate pain is severe.”

The one bright spot this month was the post Thanksgiving holiday spend up. Black Friday sales were estimated at 3% over last year’s numbers. ShopperTrak said in a report Saturday that preliminary sales for Black Friday totaled $10.6 billion. Separately, the National Retail Federation’s shopper survey reported on Sunday that average spending over the Black Friday weekend - both at physical stores and online - rose 7.25% from last year.

What is the NFP report?
Of all the world monthly economic reports, the monthly U.S. Non Farm Report (NFP) is the most highly anticipated and has the most dramatic impact on the currency market.

The report, which is released on the first Friday of each month and states the previous month’s numbers, provides detailed industry data on employment, hours and earnings of workers on nonfarm payrolls. These numbers are the best way to gauge the current state of the US market as well as the direction that the economy is heading.

What’s more, the employment numbers provided by the report are used by the Fed to shape their interest rate policies. The health of the U.S. economy and interest rates translate to the strength or weakness of the U.S. dollar.

by Todd B. Crosland

If Interest Rates are Changed In-Line with Market Expectations

Economic analysts are forecasting that Britain will lower its Official Bank Rate by 100 basis points from 3.00% to 2.00%. The Euro-Zone is also expected to cut its Minimum Bid Rate by 50 basis points from 3.25% to 2.75%.

If Interest Rates are indeed reduced by both central banks, traders may actually expect an appreciation in the GBP and EUR. Typically, a cut to Interest Rates devalues a currency as it increases the amount of that currency available in the market. However, in these times of financial crisis and global economic slow-down, an Interest Rate cut in an exceedingly weakened European economy is seen as an action which is intended to boost consumer confidence and increase spending, which may in fact help strengthen the currencies of the region instead of weaken them.

In this situation, traders may see the GBP gaining strength to test the 1.5500 level against the USD, while the EUR may regain lost ground and trade near the 1.3000 level.

If Central Banks will Surprise the Market with the Opposite

As of now, analysts are predicting a rate cut throughout the Euro-Zone, including Britain. If, however, these rate cuts are not as deep, or if they are not taken at all, the likely result will be a continuation of the current trends for the European currencies. This may indicate that the central banks of the Euro-Zone, as well as the Bank of England (BoE), are either afraid of, or uncertain about the effects of the expected rate cuts. This will indicate a deep fear in the economy and prevent many investors and consumers from regaining confidence in the market.

With this result, the GBP will continue on its downward path and likely test the 1.4600 price level versus the USD. Likewise, the EUR will continue depreciating against the Dollar with the price level of 1.2400 potentially being reached by beginning of the following week.

What are the European Interest Rate Figures?
Expected to be released tomorrow are the target Interest Rates of the Bank of England (BoE) and European Central Bank (ECB). These are called the Official Bank Rate and Minimum Bid Rate, respectively.

These figures are each released monthly, usually during the first week of the month. They are important because short-term Interest Rates are the leading factor in determining the value of a currency. In fact, most other economic indicators are used by traders to speculate about the future movement of these Interest Rates.

The British Official Bank Rate is decided on by the Monetary Policy Committee of the BoE. The Euro-Zone Minimum Bid Rate is decided on by the 6 members of the ECB as well as the central bank governors from each of the 15 nations in the European Monetary Union. According to the needs of each respective economy, the banks will elect to increase, decrease, or leave the rate unchanged. Traders pay close attention to these figures as they have a strong correlation with the value of the GBP and EUR.

Even as the pair’s decline off the 1.3081 level, its Nov 25’08 high saw some respite Tuesday rallying higher, as long as its ST falling trendline drawn from the 1.3298 high(Oct 30’08 high) or even the 1.3081 resistance level is not invalidated, EUR should likely push towards YTD low at 1.2330.Taking out the latter will resume its medium term decline now on hold towards the 1.2134 level, its .50 Ret (its 0.8231-1.6038 high, monthly chart) and later the 1.1827 level, its Mar’06 low.

On the upside, resistance is initially seen at the 1.2814 level, its Nov 19’08 high with a break of there setting the stage for a run at its Nov 25 & 05’08 highs at 1.3081/1.3116 and then the 1.3298 level.EUR still retains its broader sideways trading range between the 1.2330 and the 1.3298 levels and meaningful directional moves remain on hold until a break either way occurs. On the whole, with the present range trading seen as corrective of its declines off the 1.6038 high, lower prices are expected on completing that correction.

Support Comments
1.2484 Oct’06 low
1.2330/24 Oct 28’08 low/Jan/April’06 highs
1.2134 .50 Ret (0.8231-1.6038 rally)

Resistance Comments
1.2814 Nov 19’08 high
1.3058/05 Oct 23’06 high/.618 Ret (0.8231-1.6038 rally, monthly chart)
1.3259/98 Oct 30’08 high/Oct 10’08 low

Directional Bias:
Nearer Term –Bearish
Short Term –Bearish
Medium Term –Bearish

Formation Of A Shooting Star Candle To Trigger Further Downside Weakness

EURUSD - With the pair’s break out of a triangle and its rise off the 1.2423 level cut short after failing to push through its Nov 25’08 high at 1.3081,it has formed a shooting star candle pattern(top reversal signal) and increased the chances of further downside losses. We now see that decline targeting the 1.2423 level ahead of its strong support residing at the 1.2330 level which also combines as its range bottom.

Penetrating and negating there will open the door for lower prices towards the 1.2134 level, its .50 Ret (its 0.8231-1.6038 high, monthly chart) and then the 1.1827 level, its Mar’06 low. Its daily studies continue to trend lower suggesting further declines.

Conversely,in order for the pair to reduce the present downside threat a close above the 1.3081 level is required to signal more upside gains towards the 1.3259/98 level, its Oct 30’08 high/Oct 10’08 low. This zone and the 1.2330 level remain the trigger for any meaningful directional moves either way. On the whole, with upside failure seen, EUR should now aim at its range bottom/YTD low at 1.2330 and beyond.