The single most important economic statistic in 2011/2012 for the currency markets will likely be unemployment data from the G10 nations. The credit crunch has already impacted global capital markets, with equity prices around the world plummeting under the pressure of forced liquidation. However, the next chapter in this drama is likely to revolve around the labor markets, which could begin to degrade significantly as GDP growth contracts around the world.
Already, the U.S. unemployment rate has climbed above 9 percent. In the United Kingdom., jobless claims have climbed to the highest level this decade while Japan has seen the jobless rate climb back above 4 percent — an unsettling trend in a country where 5 percent unemployment is considered to be crisis-like conditions. In fact only Europe and the commodity block economies of Australia, Canada and New Zealand have been able to maintain job growth in this challenging environment.
The size and scale of job losses in 2011/2012 may tell us much about future direction of the G10 currencies because the extent of the unemployment problem will likely determine everything from final GDP demand to monetary and fiscal policy of each individual nation and monetary union. Presently, the currency market is anticipating a very severe contraction in the Euro Zone, as many market players presume that the credit crunch that has created such disarray in the European financial sector will result in very challenging economic conditions for Euro Zone businesses and, ultimately, a substantial decline in demand.
However, the latest data does not support such a dire view. Germany, the region’s most important economy, continues to generate jobs, even in these trying conditions. If the German labor demand remains relatively healthy, the ECB, which is tasked primarily with maintaining price stability, may not ease monetary policy nearly as much as most markets players believe. Furthermore, with EUR/USD having declined nearly 20 percent off its peak, the region’s exporters – its biggest driver of economic growth — should stand to benefit from the more benign exchange rate environment, further mitigating the recessionary scenario. In short, with the EUR/USD priced for drastic slowdown in the region, the unit may see a bounce in 2009 if Euro Zone labor conditions deteriorate materially.
If G10 economies can avoid massive unemployment, markets across all asset classes are likely to stabilise and the relentless risk aversion flows that have characterised currency trading over the past several months are likely to moderate.
