Cratering US Labour Market and FX Market

December’s US payroll jobs collapsed by more than half a million for the second straight month. More revealing is that the revisions to the prior two months suggested even deeper declines in October and November as unemployment surging at an alarming rate.

We are now seeing the full semblance of financial crisis being full reflected in real economy. The intensity of the labour market downturn matches the severe downfalls of the mid-1970s and early 1980s that it has forced income into negative territory for the first time since 1982. It possibly would have to take a massive tax relief under Obamanomics to replace the shortfall in incomes as the labour market meltdown persists.

The average peak-to-trough percentage decline for payroll job recession since 1960 is -2.1%. Twelve months already from the peak, payroll jobs are down -1.9% in the current episode and there are indications that the current downturn could be longer than the average 14 months. Even those still employed, the work-week shrank to 33.3 hours and that translated into a big hit in the size of paychecks. The rate of decline in temp employment is accelerating – down 83K per month on average over the last two months compared to 32K on average during the first ten months of the year. Full time job opportunities are getting scarcer. Roughly 1.75 million more people in December were working part-time for economic reasons than in September.

Translating this to FX market, I note that exchange rate markets are still very much US-centric, especially to movement in US equities. That in my opinion, is definitely not sustainable for US dollar but market will stay hopeful for stimulus spending after the inauguration of Obama as US president next week (January 20, 2009). Until then, I expect the EUR to remain under pressure from rate cut expectations when its governing council meets on January 15, while on the other hand, Yen seems to be unable to shake off its role as a gauge for risk aversion.

And as long as EUR remains under downward pressure, I expect some Asian currencies, especially SGD, MYR and TWD to face upside pressures. Not surprisingly, the MYR has been taking its cut from its neighbour – the SGD since the USD bottomed last July. Of course, the biggest risk to this view is that the Chinese economy, especially exports data slide deeper into negative territory this week. In the same breath, the dismal Chinese economic data will undermine optimism for KRW and TWD as the market is struggling between recovery hopes and the reality of the US has yet to overcome its structural problems. In essence, I believe this calls for more than just range-trading but with a more pessimistic bias.