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Although the news has been mixed out of many developed markets, the U.S. economy has been chugging along over the past month thanks to some solid data on not only the manufacturing but the jobs front as well, helping to boost investor sentiment in the process. The jobs figures have been especially encouraging as the ADP report crushed expectations while the initial jobless claims came in lower-than-expectations too, leading many to think that the recovery is finally starting to trickle into the labor market.
One would think that with all this good news, the dollar would be doing quite well, yet, with declining worries over European debt as well as higher rates for the common currency, that has not been the case. Furthermore, with the debt ceiling issue still hanging over the market, the U.S. dollar index has been on the decline over the past week or so, much to this dismay of traders who bought in thanks to solid economic news. Yet, today's employment report could help to change the short-term trend of the dollar, potentially sending the greenback higher against many of the world's currencies, while also helping many to at least temporarily forget about the debt ceiling problem that is hanging over the market.
Analysts expect the overall unemployment rate to stay flat at 9.1% but are looking for job creation in the neighborhood of 125,000. A figure at this level or higher would go a long way in terms of helping market participants believe that last month's reading was an aberration. In that month, just 54,000 jobs were created, an incredibly low number considering that expectations called for an increase of 169,000. As a result, another solid number this month could help to reestablish the long-term trend, which saw three consecutive readings that were better-than-expectations. Plus, all three were over the 190,000 level before last month's disaster took place, putting extra pressure on this month's report to set the record straight [ETF Insider: Buying Opportunities After Panic Selling].
Thanks to this important release and its impact on the economic outlook for the United States, investors should look for the PowerShares DB USD Bullish Fund (NYSE: UUP ) to be a big mover in today's trading session. The fund tracks the Deutsche Bank Long US Dollar Index (USDX) Futures Index, which is a rules-based benchmark composed solely of long USDX futures contracts. The USDX futures contract is designed to replicate the performance of being long the U.S. dollar against the following currencies: Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc. The index is trade weighted so more than half of the currency exposure is against the euro, with the yen in a distant second followed closely by the British pound [see more on UUP's fact sheet].
UUP has been pretty rocky over the near term as the fund has gained close to 70 basis points in the past week, but it has lost sixty basis points in the past two-week period. With that being said, the longer term trajectory is definitely down; UUP has lost close to six percent so far this year and has declined by 12.4% in the last 52 weeks. This is even worse when you consider all the trouble that the eurozone has been having over that time period, further highlighting the economic malaise that the U.S. has been facing. Should the nonfarm payrolls come in above expectations, it could be a solid day for the dollar to close out this holiday-shortened week. If, however, investors see a repeat of last month's nonfarm report, look for the dollar to sell-off against many of its global rivals, pushing UUP further underwater for 2011 [see more fundamentals of UUP here].
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Disclosure: No positions at time of writing.
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