Unemployment taking its toll
Unemployment seems to be emerging as possibly one of the key issues of 2020 and most likely going to continue as a main factor in 2021. Unemployment is spoken about strongly by analysts and central banks, but a lot of traders question what impact this has on the financial trading market and tradable assets.
A Quick Economics Lesson
Firstly, the easiest way to connect unemployment with currencies is the correlation between employment and inflation. Healthy employment is the success of all economies and tends to be the main focus of central banks alongside inflation.
To make it simple, the higher employment there is and the lower the unemployment, the more individuals are likely to spend. At the same time the government is likely to have higher revenue and therefore, a more competitive fiscal policy. This is likely to result in high inflation which straight away will increase the demand for its regional currency.
The connection, however, does not stop there. Higher employment can equal high inflation, yes, but the domino effect will likely continue in favour of the currency. As inflation figures come in higher, the central bank will likely consider increasing interest rates to contain inflation. The Central Bank will use interest rates to avoid high inflation causing a boom and bust scenario such as in 2007. The higher interest rates will largely support the currencies exchange rate as traders rush to benefit from higher yielding accounts.
Employment in the US
If we look at the USA and Non-Farm payroll, we at times see sentiment increasing with figures achieving higher than predicted. However, the employment seems more fragile than ever, with a lot of traders overlooking some of the facts:
- Close to 13 million US Citizens were unemployed in September. That’s just over 7 million more workers than pre-COVID-19 figures.
- The early part of the recession was characterized by temporary layoffs by many senior politicians and CEOs, but permanent job loss is rising according to new reports.
- A growing share of employees also have been unemployed in the “long-term”, meaning they’ve been out of work for more than six months. The longer individuals are out of work, the harder they are likely to find employment.
Permanent job loss has been increasing. In September 2020, the number of permanent job losses grew by 345,000 to 3.8 million, according to the Bureau of Labor Statistics. That figure exceeds pre-pandemic levels by 2.5 million people. This suggests some layoffs once thought to be temporary, have instead become permanent, CNBC economists advised.
Employment in the Europe and UK
At times, the market is able to see a direct link between employment figures and exchange rate movements. For example, the Pound instantly reacted negatively to yesterday’s employment data. The number of unemployed people in the UK increased by 153,000 against the expected increase of 30,000; this is 5 times higher than expected. This significant increase triggered an increase in the overall unemployment rate to 4.5% from 4.1% in July. Despite this, Claimant Claims decreased and amounted to 28,000, which is better than the expected 78.8K.
Also yesterday Prime Minister, Boris Johnson, announced a new three-tier system of rules. These new rules may result in certain areas of the UK falling into a full lockdown. This may again result in further strain on the employment sector if it is kept in place throughout the remainder of the year.
Unemployment in the European Union and the Euro Area continued to climb in August, following the same trend as in the previous months, statistics from the EU’s statistical office show. According to Eurostat, the unemployment rate in the EU increased to 7.4% in August, while in the euro area it rose to 8.1%. The report said that, compared with July, the number of unemployed increased by 238,000 in the EU and 251,000 in the euro area.
Overall regional employment has proven to be directly linked to economic restrictions and quarantines. In addition to this, employment in the West seems to not be as stable as originally thought. The question traders now are asking is how far will restrictions go and for how long.