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Forex - Is the Dollar Sell-Off Over? It Depends on Payrolls

DailyFX Fundamentals 11-02-06

By Kahty Lien, Chief Strategist of

• 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.


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