Earlier
this week, on Wednesday, we remarked upon the “palpable
sense out there that the US dollar is coiled, ready for actionhttp://commentary.omicronforex.com/2014/07/us-gdp-and-payrolls-will-inform-fomc.html” . Everything that has happened in the Foreign
Exchange markets since then has added to that understanding.
One
of the pairs most sensitive to US dollar strength, or the lack thereof, is the
USDJPY instrument. It seemed for some time to have been in a well-defined sideways
range but, while always accepting that Technical Analysis by the study of chart
patterns can be a subjective undertaking, it would now appear that the pattern
was a descending triangle, and one from which price might be in the process of
breaking out to the upside (see chart above).
One
problem with this is that a descending triangle is most often thought of as
being a bearish signal, although in the case of a rising market prior to its
formation, it can be a continuation pattern. In this case we will tend to go
with the latter interpretation, especially if the US Non-Farm Payrolls report, due
later today, confirms that the US economy is, at long last, coming back to what
we would all regard as normality.
Payrolls, participation, inflation and
Forex
And
given that payrolls will be in focus today it might be appropriate to comment
on the linkage between them and currency rates. At the most basic, employment
rates that are tending towards full employment can generally be expected to
lead to increased wages, due to good, old-fashioned market forces. This in turn
causes prices to increase, as companies must get more revenue to remain profitable.
So we get inflation. Workers feel the pressure of this, they look for higher
wages and a cycle, which can quickly get out of control, starts. Rising
inflation leads to increased currency exchange rates in the economy concerned.
Coming
out of this recession there is, at the present time, no such pressure, at least
not yet. In fact in Europe the big fear is deflation, which will cause
consumers to postpone the purchase of big-ticket items and thereby delay
recovery. So central banks in the developed economies would really like to
see higher employment and even some upward pressure on wages.
Now
the subject that is exercising the minds of many in the Bank of England, the
ECB and the Fed is the participation rate. This refers to the proportion of
those who are eligible for work but who have given up looking for it. There is
a fear that the current relatively low unemployment rates in both the UK and
the US are skewed because of this, and that when opportunity picks up these
people will come back into the labour market. This is the reason for the talk
of slack in the economy that we hear from time to time.
There
are a number of theories for the relatively high number of people that seem to have
opted out of the labour force. It could, indeed, be that individuals are
disillusioned. In the UK economists have put it down to more self-employed, and
this could be the case stateside as well. However, there is one factor that
really could make the situation “different this time”. That is the large number
of so-called baby boomers who are now retiring. And whatever pressure they put
on pension funds in the western world in the future, it is unlikely that they
will be re-entering the labour market.
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