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Forex: Dollar Weakens Despite Expectations For Strong Payrolls Data

DailyFX Forex Fundamentals 11-04-04

By Kathy Lien, Chief Strategist of

· Dollar Weakens Despite Expectations For Strong Payrolls Data
· ECB and BoE Keep Rates Unchanged
· Swiss CPI Rises Unexpectedly


The euro is slowly climbing higher towards its all-time high of 1.2930 with no specific basis for appreciation aside from an extension of bearish dollar sentiment following the US Presidential Elections and the pure desire for some bank dealers to target stops that may be set at or slightly above the all-time high. However, further gains above that level will be contingent upon tomorrow’s US non-farm payrolls report (see USDCHF comments for more details). Today, as expected, the European Central Bank left interest rates unchanged at 2.00%. ECB President Trichet warns that the central bank continues to monitor the impact of rising oil prices on consumer prices. CPI has been above the central bank’s 2.0% target for five consecutive months. Producer prices increased by 0.2% for the region over the month of September, as the rise in oil prices brought the annualized rate of growth up 0.3%. The unemployment rate remained unchanged but was revised lower to 8.9% in the month of August. Meanwhile German factory orders fell –0.2% in September, which is the second consecutive monthly decline. Overall, growth in the region has not been particularly noteworthy. However, it has been some time since the euro moved on Eurozone fundamentals rather than US fundamentals.


US non-farm payrolls is the biggest event on the financial market’s agenda tomorrow. Over the past 10 months, the EURUSD has generally moved 1% or more in the 24 hours following the non-farm payrolls release. There is no reason for us to believe that tomorrow’s payrolls release will be any different. Forecasts for the payrolls report range from a low of 85k to a high of 325k, with an average consensus forecast of 175k. Over the past year, economists have overestimated payrolls a number of times and although that still remains a risk for tomorrow’s release as well, evidence suggests that payrolls may be closer to consensus this time around. Employment indicators are mixed, but certainly more weighted to the upside. Jobless claims dipped to 332k for the week ending October 30th, which implies a healthier job market. The employment index remained unchanged at its all-time high, indicating that online job recruitment remained strong through the month of October. Other data we received earlier this week suggests that layoffs have slowed while employment is growing in the service sector. The most recent Beige Book report indicates that reports of permanent hiring have become more frequent. State employment reports also suggest that hurricane disruptions are expected to have drained 40k-60k jobs last month, which are expected to be normalized in October. Therefore evidence is supportive of stronger payroll gains in the month of October. The payrolls derivatives auction created by Deutsche Bank and Goldman Sachs estimates that traders expect businesses to add 186,000 in October. Meanwhile Swiss CPI increased a more than expected 0.9% last month, with an equally strong reading in core CPI. In contrast, Switzerland’s SECO Swiss consumer sentiment survey reported that consumers are becoming increasingly concerned about job security and the general outlook for the Swiss economy. Taking both releases into consideration, the Swiss National Bank will most likely keep interest rates unchanged for the remainder of the year.


As expected, the Bank of England kept interest rates unchanged at 4.75%. The house price survey from HBOS is the latest piece of evidence that confirms the slowdown in the housing market. According to the report, house prices fell –1.1% during the month of October, bringing the annualized house price acceleration down to 18.5% from 20.5%. Tomorrow we are expecting industrial and manufacturing production. IP is expected to accelerate in the month of September after contracting for three consecutive months. The –0.8% decline in August erased any hopes of another rate hike this year by the Bank of England.


The dollar continues to test the downside of its recent range against the Japanese yen. China reported overnight that they are on course to move towards a more flexible currency regime. This is no surprise as they have previously acknowledged this intention. The real wild card is timing though – whether they plan on increasing flexibility over the next year or next 5 years. One year NDF forwards have widened significantly over the news, as the markets hope for any sort of revaluation by the Chinese government. A revaluation of the Yuan would be positive for the Japanese yen, since Japan vigorously competes with China on exports. We continue to warn of the increased risk of intervention efforts by the Japanese government at current levels. With the election results a concern of the past, the Ministry of Finance may step in to curb yen gains.


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