·
Next Up for the Dollar is the Mid
Term Elections
·
Bank of England
to Lift Rates to 5.00 Percent
·
Reserve Bank of Australia to Lift Rates to 6.25
Percent
US Dollar –
After three weeks of near continuous
losses, the US dollar managed
to stage a very strong rally on the back of the non-farm payrolls release. Even though the number of jobs created
in the month of October fell short of expectations, the market shrugged off the
report and focused on the upward revision the prior month. These days, US data
needs to be looked at on so many different levels and today’s NFP report was no
exception. If you looked at the 92k
print alone, it would seem that the US economy had another month of weak job growth. However, that is not true given the 97k
upward revision in the month of September and the drop in the
unemployment rate from 4.6 to 4.4 percent.
With an average job growth of 120k over the last 2 months, the labor market
remains tight. In contrast to the
manufacturing sector, the service sector ISM index actually increased from 52.9
to 57.1, the highest level since May.
However, the problem is that today’s move in the US
dollar stalled right at a critical resistance level and the week ahead brings us
a number of potentially dollar bearish news. Aside from speeches by a variety of Fed
Presidents on the economic outlook, we also have the trade balance and the
Mid-term elections. Given the
rarity of the event, the Mid-term elections could have a meaningful impact on
the currency markets. In all but
one of the past six Mid-term elections, the US dollar has rallied in the 3 months afterwards. The common theme between each of these
elections is the fact that it was a one-party majority win. The reason why this is perceived as
dollar positive is because it allows for legislations to be easily passed and in
this case, given that the Republicans control the majority of Congress, their
one party majority win would be seen as pro business. However, if Democrats win over
Republicans, the political gridlock would delay any legislation and potentially hold
back government policy changes for the next two years. In this case, it would most likely be
perceived as dollar negative.
Euro and Swiss Franc –
Even
though the EUR/USD sold off today, the market has not forgotten about ECB
President Trichet’s extremely hawkish comments from Thursday. The Euro quietly licked its wounds and
retraced about a third of this morning’s losses. The sole release from the Eurozone today
was the unemployment rate for the month of
September, which held steady at 7.8 percent, after a downward revision from 7.9
to 7.8 percent for the month of August. This is yet another piece of evidence
that the economy is improving, which should keep the EUR/USD strong going into
the new week. Unlike the US,
which has only 2 major releases for the market to focus on, the Eurozone has a
number of important data due for release including retail sales, as well as
industrial production and trade balance for
Germany and France. The ECB’s hawkish stance should be
further confirmed by the release of the November
monthly bulletin next Thursday and unless we
have a majority Republican win in the US Mid-term elections, further losses
are probably limited.
British Pound – All
rallies meet phases of exhaustion and we saw just that in the British pound
today as the currency buckled under dollar strength. After having rallied for six straight
trading days and consolidating for one, the surprisingly robust non-farm
payrolls release was enough for pound bulls to throw in the towel, albeit
probably only temporarily.
UK economic data continues to print
stronger with the CIPS Services PMI index
rising from 57.0 to 59.3 in the month of
September, which is the highest reading that we have seen the index since
April. This indicates that not only
is the construction sector doing well, but so is the service sector which leaves
the central bank on track to raise interest rates from 4.75 to 5.00 percent next
Thursday. Aside from the monetary
policy meeting, we are also expecting a number of key economic releases
including industrial production, BRC retail sales and
the trade balance. The pound has
been very strong and should remain so for the coming week.
Japanese Yen – The Japanese Yen has
now sold off for three straight days despite the lack of any meaningful economic
data. Fukui has really killed the
currency this week when he said the central bank was in no rush to raise
interest rates. This gave carry
traders the green light to continue to stay short the Japanese
Yen. There was quite a bit of
liquidation earlier this week and the recent moves could be a reflection of
those same traders reinitiating positions.
There is a handful of Japanese economic data next week but
nothing of consequence. EUR/JPY is
back above 150 – when we visited this level on prior occasions, comments from
either Japanese officials or
officials from other countries frequently surfaced as attempts to talk up the
currency (Japanese Yen). We would be cautions of the same thing
happening again if prices remain above that level in the week ahead.
Commodity Currencies (CAD, AUD, NZD)
– The commodity
currencies have had a big run this week led by strong gains in the
Australian and New
Zealand dollars. The Canadian dollar lost strength, but was saved a bit by
today’s stronger employment data.
Originally expected to rise by only 15k in the month of October, the net
employment change actually increased by 50.5k, bringing the unemployment rate
down to 6.2 percent from 6.4 percent, the lowest level since June. At this point, the economic outlook for
the economy is unclear and the hope is that either Bank of Canada
Governor Dodge or Deputy Governor Longworth will clarify things in their
speeches next week. If not, the
Canadian dollar could continue to suffer from
the remnants of the surprise tax on income trusts. Australia has an interest rate
decision next week and despite the weaker data yesterday, they are still
expected to raise interest rates to 6.25 percent. Aside from the announcement, Australia will also be releasing
housing finance and labor market data.
New Zealand also has
some labor market reports due for release but unlike Australia, the economy is not
performing as well, which suggests that the data could come in softer.
