Fed Announcement and ADP Helps to Lift the Dollar

Positive economic data has continued to drive the US dollar higher. Payroll provider ADP reported a 9k rise in jobs this month. As one of the leading indicators for non-farm payrolls, this along with stronger consumer confidence numbers is good news going into this Friday’s non-farm payrolls report. However don’t expect positive job growth in the month of July. The only thing that the ADP number suggests is that the number of job losses could be less severe than the prior month. The four week moving average of jobless claims have also fallen in the week ending July 19 even though initial claims climbed to 406,000. Nonetheless, we can not forget the countless layoff announcements that have surfaced over the past two months and the fact that US companies are cutting back.

ADP has a track record of being notoriously optimistic about projecting payrolls. Non-farm payrolls dropped in each of the past six months but between January and June, the ADP employment survey on the other hand only dropped 2 out of the 6 months. ADP has consistently missed to the high side and we expect the same this month.

Meanwhile a surprising announcement from the Federal Reserve has also helped to rally the US dollar and US stocks. “In light of continued fragile circumstances in financial markets,” the Federal Reserve extended the tenure of their Primary Dealer Credit and Term Securities Lending Facilities. This means that in addition to their 28-day loans, they will also be selling 84-day loans. In response, the European Central Bank and the Swiss National Bank will also be making 84-day funds available at dollar auctions. These actions should help to calm the markets, especially as the rally in the stock market continues to ease risk aversion. However the changes are incremental since the Fed is simply tweaking their existing programs to give themselves more flexibility when there are times of “elevated stress.”

As we have been mentioning all week, the dollar should continue to rally. The advance release of second quarter GDP is due for release tomorrow. Despite the inherent problems within the US economy, GDP growth is expected to accelerate thanks to the rise in retail sales.