US Dollar: Rising Layoffs Poses Big Risks to US Labor Market.Todays recovery in the US stock market, carry trades… … and bond yields brought optimism back into the financial markets.

News that BNP Paribas
will be reopening its three frozen funds and reports that four of the
nations largest banks tapped the Feds discount window as a vote of
confidence has been taken very positively by traders and investors.
Even though the rebound today was strong, which means that we could see
a bit more extension tomorrow, traders need to be cautious because this
is nothing more than a reflex rally. There was as much bad news as
good. All of the weekly reports including the ABC consumer confidence
and mortgage applications fell sharply. Confidence saw the steepest
drop in 20 years. Lehman Brothers became the first Wall Street bank to
close down its subprime lending unit and will be laying off 1200
workers. In fact, layoffs are being announced on a daily basis. The
estimated toll of subprime related job losses is approximately 37,000.
Even for the companies that are not cutting back on their workforce,
they are not likely to be hiring either. The word on the street is that
many companies have instituted hiring freezes. With the costs of
borrowing increasing and demand for corporate issued commercial paper
falling, keeping profit margins steady is the top priority for most
companies. On a consumer level, a weaker labor market could put a big
strain on household finances. On top of the rising cost of mortgages,
credit card lenders are also increasing their terms of credit. This
includes higher interest rates, lower lines of credit and more stringent
review of finances. This would of course spell weaker consumer spending
and eventually weaker us growth.

Bank of Japan Not Expected to Raise Interest Rates

Carry trades have rebounded strongly today thanks to the drop in market
volatility. The VIX index has fallen another 2 points and is now close
to 40 percent off its 4 year highs. The Bank of Japan will be
announcing their monetary policy decision tonight. Given their repeated
liquidity injections and the overall turmoil in the credit markets, the
BoJ is not expected to raise interest rates. They will however be
releasing their monthly report. Economic data has not been that hot
over the past few weeks which suggest that the central bank could be a
tad more pessimistic about growth. Last night Japan released their July
merchandise trade balance which dropped from Y1223.4B down to Y671.2B.
The drop in supermarket sales also worsened last month. The only saving
grace is the continual demand from China. Exports to China increased
20.6 percent year over year. The Asian Giant is expected to shelter most
of the region from any major subprime related fall-outs. China
announced earlier this week that they will be allowing their citizens to
start investing in the Hong Kong stock market. The markets see this as
one of the countrys first moves toward more open markets and in the
future, they expect China to also allow investments in countries like
Tokyo and Singapore. There is a lot of money at stake. JPMorgan
estimates that at least $100bn of the countrys $2,300bn in individual
savings will leave China over the next year, with outflows increasing to
$500bn over the next 3 years.

Stronger Eurozone Data Helps to Boost the Euro

Surprising strength in Eurozone industrial orders along with overall
weakness in the US dollar has helped to trigger an upside breakout in
the EUR/USD today. Despite the prior strength of the Euro, industrial
orders increased 4.4 percent in the month of June, which was the largest
increase in 18 months. The current account also jumped back into
positive territory after dropping the prior month. The final release of
second quarter GDP is the only piece of data on the Eurozone calendar
tomorrow. The market has a pretty good grasp of what the Fed may do in
September and now it is just a matter of figuring out what the European
Central Bank will do. The best case scenario for the health of the
European economy would be if the ECB stands pat, but that may not be the
best outcome for the Euro. The lack of comments from ECB President
Trichet in recent days suggest that he is digesting the recent moves in
the credit markets just like the rest of us and will probably be basing
his decision on whether the markets stabilize. Meanwhile Switzerland
has trade balance and employment data out tomorrow. Swiss data has had
the habit of surprising to the downside, but that has not mattered to a
market still focused on carry.

Strong Gains in British Pound Following Hot Manufacturing Data

The British pound rallied strongly today following news that factory
orders hit the highest level in 12 years. Even though more firms
reported shrinking demand from abroad, the jump in the export and price
indices pushed the overall index back into positive territory. Over the
past few days, we have seen multiple reasons alluding to why the Bank of
England has not done much to help stabilize the UK financial markets.
Even though the economy is vulnerable, for the time being, it remains
stable. Traders were also relieved after the Bank of England downplayed
the recent usage of emergency loans. They said that the line of GBP314
million was small and not unusual. Apparently over the past year, the
facility was tapped 13 times with the largest amount borrowed being GBP4
billion.

Canadian, Australian and New Zealand Dollars All Rally as High Yielders
Recovery

The Canadian, Australian and New Zealand dollars continued to move in
lockstep this morning. Yesterday, all three currencies weakened against
the US dollar and today, they all rebounded relatively strongly. There
was no New Zealand or Canadian data released, but Australia reported
stronger than expected leading indicators and higher skilled vacancies.
The Reserve Bank of Australia also continued to inject liquidity into
their financial system, showing their commitment to ensuring stability.
The sustainability of the stock market rally will determine whether
these high yielding currencies will continue to recover.

DailyFX Research Team
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: research@dailyfx.com

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