Jobs Report Supportive For U.S. Dollar, But Where Do We Go From Here?

 |  Includes: DVN, FXA, FXE, SHI, UUP
by: Ralph Shell

Today's NFP report seems supportive to the U.S. dollar, and delivers another body blow to the euro. The total new jobs created, 200K, was higher than the expected 150K. Again the jobs created, 212K, were in the private sector, while there was a loss of 12K government jobs. We focus on this number today, but there are two very important caveats: These numbers will be adjusted in the future, and this remains less than the 250K/month needed to get unemployment back down under 6%.

There was an unexpected drop in the employment rate to 8.5%, and a drop in the U6 unemployment to 15.2% from 15.6%. Since this is an election year, any positive numbers coming from Washington and pertaining to unemployment should be treated with skepticism.

The numbers were greeted by the USD longs versus the euro, reassurance they were on the right side of the market, as the euro sold down to 1.2724. Currency traders, often with highly margined positions, are so focused on the next immediate move, that following longer trends is almost a luxurious diversion.

In the U.S. there is currently a change, almost a revolution taking place in domestic energy production. Horizontal drilling and fracking techniques have advanced, and so have the estimates of natural gas and liquid reserves. In Pennsylvania alone it is estimated 300K new jobs have been added in the last two years, as natural gas companies begin to develop the Marcellus formation. Some estimate that underneath Pennsylvania alone, there are enough reserves to supply the entire U.S. with gas for the next 100 years.

Moving further west into Ohio, and drilling a little deeper into the Utica shale formation, is a mixture of natural gas and liquids. This week Devon Energy (NYSE:DVN), a large acreage holder in the Utica formation, sold one third of its interest to Sinopec (NYSE:SHI), a Chinese based oil and gas company, for $2.2B. Combined, these companies plan to drill 125 gross wells in 2012. There are some optimists who project the U.S. will be the biggest producer of oil in the world within five years.

North Dakota, where some of the first horizontal wells were developed, is now about to displace California as the second largest producing oil state. Will Ohio displace them in the future?

In parts of the U.S., this energy revolution is creating jobs and wealth. Too often we focus on the negative, and it is possible the heavy hand of Washington and its stifling regulations can still impede this growth. But this train has left the station and the misguided policies of Ken Salazar and friends cannot stop this movement.

The pressure continues on the euro as we move toward the close of the first week of 2012. The problems remain unchanged. The European Banks have made too many loans of dubious quality, and there is too little interest in bailing them out. As the U.S. economy bumbles forward at a 2%-plus growth rate, Europe is turning negative. How much of this is already in the market?

The weekly chart in the Australian dollar looks interesting. The Aussie has enjoyed a three week rally from under .99 to almost 1.04, but has faded late in the week. Will the Aussie be influenced by the malaise in Europe, and the consequent slow down in demand for Chinese manufactured goods?

Next week we also get some numbers from China. Will this provide clues about the Chinese economy? It is early in 2012, but we suspect the Australian dollar is getting set up for a good size move. The direction will probably depend on economic factors outside of its boundaries. We need to follow this closely.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.