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Thursday November 3, 2005 - 22:07:38 GMT

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Forex: Wide Range of Payroll Estimates Could Cause Significant Volatility in Dollar

DailyFX Fundamentals 11-03-05

By Kathy Lien, Chief Strategist

• Wide Range of Payroll Estimates Could Cause Significant Volatility in Dollar
• Euro Slides as ECB Leaves Interest Rates Unchanged Once Again
• Pounds Weakens Despite Encouraging Service Sector Data

US Dollar

The dollar has strengthened once in anticipation of tomorrow’s non-farm payrolls report. Right now, the consensus is for 120k jobs to have been created in the month of October. Of the 70 analysts surveyed, the estimates ranged from -25k to +300k. Such a wide range suggests that the market as a whole really does not know what payrolls could be reported at. For us, this means that there could be a great deal of volatility regardless of whether the number comes out inline or not. For the most part, the forecasts seem to be biased to the upside, which means that a disappointment could result in a larger move in the dollar than an upward surprise, but of course the size of a disappointment or surprise plays a big role in determining how large the move would be as well. Bulls clearly have control of the dollar at this point and payrolls tomorrow could shed some more light on whether they will be able to hold onto their control. The market will be keen to see how deep Hurricane Katrina’s impact is to the labor market. Last month, 35k jobs were lost as a result of the hurricane. Meanwhile, every positive event today had some sort of dark cloud hanging over it. Service sector ISM rose to 60.0 from 53.3 and surprisingly, the prices paid component actually dropped. However even though all of the components were in expansionary territory, only three out of the nine components actually experienced accelerated growth. September factory orders fell by 1.7%, which was weaker than the market’s -1.0% forecast. Greenspan was optimistic on the current state of the economy and cautioned about growing inflation, both of which were positive for the dollar. However, he also warned that higher winter heating bills could pose a big risk to consumer spending and that consumers in general might be "quite surprised" when they receive their statements this winter.


The Euro took a nosedive today, erasing all of the past two days worth of gains as the European Central Bank left interest rates unchanged once again. Trichet stated that the bank is ready to raise rates in order to curb inflation. Market News International reported that according to an unidentified senior official, the ECB should be moving on rates no later than February. There is a pretty broad based consensus that rates will remain on hold for the remainder of the year, but there are many people speculating that the ECB may begin tightening monetary policy next year. Meanwhile data release from the Eurozone this morning was mixed. Service PMI for October was released for Spain, Italy, France, Germany and the Euro-zone as a whole. All the countries showed continued expansion in their service sectors however Germany and Spain showed a drop in the index from last month. The overall service indicator for the Euro-zone rose 0.2 to 54.9 with the rise led by outstanding business and business expectations. This expansion continues to be driven by a combination of a lower Euro, softer energy prices and stimulative interest rates.

British Pound

Taking a hit from positive US data, the British pound weakened against the dollar, but compared to the Euro, held its ground fairly well. There were only two releases out of Britain today. First was the announcement of changes in official reserves, dropping by $187 million in October after rising $197 million a month earlier. The major release for the morning was the purchasing managers’ index for the services sector. The survey was expected to come in at 55 but actually rose to 56.1, the fastest pace in 3 months. The service sector accounts for roughly 60 percent of the British economic output and an increase here is a flash of hope for the faltering economy. Seeing a slight rise in a few indicators recently coming from Britain, this addition possibly indicates that the British economy is beginning to perk up a bit on all fronts. These positive service indicators disintegrate possibilities of any further rate drops by the Bank of England. Officials have been wary of lowering rates due to high inflation but have also been worried about the unsteady state of the economy. With the economy showing some growth, the bank can take a deep breath and worry about inflationary pressure like most of the other central banks around the globe. The Monetary Policy Committee is set to meet next week when they will most likely keep interest rates unchanged once again.

Japanese Yen

With Japanese markets closed today for Culture Day, the yen was left to the whims of other markets. Hurt by opportunists taking advantage of the wide interest rate differentials between the yen and the US dollar as well as the stronger than expected US service sector releases, the USDJPY pair shot broke above the 117 barrier to trade at 25 month highs. Over the past few month, the Japanese yen has been very weak against the dollar, with the greenback rising over 7.3 percent in 2 months. As the Fed continues to raise rates and the Japanese continue to keep in tact their extremely loose monetary policy, the yen is become less and less attractive to traders. Hence without a positive boost from the country or a catastrophic announcement for the dollar, the yen could continue to lose strength against the dollar.


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