·
Is the Dollar Sell-Off Over? It
Depends on Payrolls
·
Euro Rallies on Very Hawkish Comments
from ECB Trichet
·
Yen Slides after BoJ Fukui Says No
Need to Lift Rates Too Quickly
US Dollar
Is the sell-off in the US
dollar over? Probably not over the
long term, but in the short term, it could very well be over if tomorrow’s
non-farm payrolls release prints strongly.
The US dollar is finding support against
most of the majors except for the Euro, which has benefited from the
surprisingly hawkish comments from the European
Central Bank earlier this morning.
Despite another round of mostly weak US
economic data, the dollar is having a hard time falling further. At this point, the market is no longer
surprised by weak economic data, especially from the manufacturing sector. Non-farm productivity, factory orders
and jobless claims all came out weaker than expected. The only upside surprise was in unit
labor costs which confirmed the similar rise that we saw in the Employment Cost
Index earlier
this week. Although a rise in labor
costs is inflationary, with energy prices remaining very low and core prices
following slowly, the Federal Reserve is probably far more concerned about
growth at the moment than they are about inflation. Furthermore, whenever labor costs rise,
it is also a burden for businesses. Instead, tomorrow’s non-farm payrolls
print will be extremely important. With only 51k jobs created in the
month of September, anything short of a triple
digit print will be perceived as very bearish for the US
dollar. Analyst estimates are all
over the place with the highest forecast being 180k and the lowest forecast at
72k; the median is 123k. Of the 76
analysts surveyed by Bloomberg, 20 percent of them are calling for a double
digit print. We believe that it would be quite disastrous to see anything less
than 100k and judging from economic data has already been released, this
downside surprise will probably not materialize. Jobless claims have been very low for
the past month while the ADP payroll and
Hudson
employment indices surprised to the upside. The only risk we see is from the real
estate and housing market.
Construction activity has been falling and we are sure that jobs related
to that industry such as real estate agents and
mortgage brokers are also suffering.
Either way, with the US dollar at a very important support
level, non-farm payrolls should help determine whether we will see a bit more of
a bounce or further losses.
Euro and Swiss
Franc
The Euro
was one of the few currencies that managed to rally against the US
dollar today thanks to very strong comments from ECB President Trichet. Repeating that strong vigilance is
needed to tackle inflation, Trichet was also very confident about growth and
weary about the upside risk to inflation.
The fact that he bypassed a rate hike today explains why the Euro only
saw a modest rally. At this point,
a December interest rate hike is practically guaranteed. However Trichet refused to provide much
guidance beyond that which means next month’s monetary policy meeting will really be
the one worth watching. Stronger
economic data also helped the Euro register gains. The region’s overall manufacturing
index increased from 56.6 to 57.0, led by
improvements in Italy and
France. German manufacturing conditions was
slightly weaker, but that was offset by a sharp fall in unemployment claims in
the month of
October. Overall, the mixed data
that we have seen in recent weeks suggests that even though the Eurozone may be
vulnerable to growth in the US, so far, it is holding up fairly
well on its own. Meanwhile Swiss
consumer prices were much weaker than expected in the month of October. Headline prices increased by a paltry 0.3
percent, with the annualized pace of growth slowing to the same pace from 0.8
percent reported last month.
It seems that the decline in energy prices has really hit consumer prices
and given that, do not expect a rate hike from the Swiss National Bank anytime
soon.
British Pound
After six
straight days of gains in the British pound – US
dollar currency pair, we are finally seeing signs of weakness. The pair is ending the day unchanged
despite a very firm construction sector PMI report. The economy is continuing to do very
well with the housing market leading the pack. Although the currency pair appears poised
for a turn, the combination of hawkish comments from the central bank, continual
merger and acquisition flow and strong data should keep any losses limited. Service sector PMI is due for release
tomorrow and the risk is for an upside surprise similar to what we saw in the
construction sector index this morning.
Japanese Yen
Despite the lack of economic data, the
Japanese Yen is continuing to
sell-off against the majors as the old battle between the Japanese
government and the Bank of Japan heats up once again. Traditionally the government holds the
central bank back from any actions that would reduce the stimulus in the
economy. Last night however, the
tables seem to have turned as the Bank of Japan is the one that is more relaxed
about monetary tightening. Once again, the Ministry of Finance’s Watanabe
expressed concern about the value of the Yen and how fundamentals do not warrant
further
weakness. The Bank of Japan’s
Governor Fukui on the other hand said that there is no need for the central bank
to lift interest rates too quickly.
This is actually quite important since the Fukui is typically a very aggressive supporter
of higher interest rates. His
relatively relaxed stance will certainly keep carry trades in play for a while
longer.
Commodity Currencies (CAD, AUD,
NZD)
The movements in the commodity
currencies are much quieter today.
The Canadian dollar extended yesterday’s
sell-off after the government announced plans to tax income trusts. There was no data released today, but
like the US, employment is due for release
tomorrow. Payrolls growth is
expected to slow slightly from 16.2k to 15.0k, which would be yet another piece
of evidence that the fall in oil prices has been hurting the economy as a
whole. Interestingly enough,
Australian data has taken a turn for
the worse as both the trade balance and retail sales came in much weaker than
expected. This poses a slight risk
to the widely anticipated interest rate hike by the Reserve Bank next week,
which explains why the Australian dollar is down for the day.
