U.S. Dollar: Fed Sets Up the NFP

Last updated 11/4/2009 4:34 PM EST (GMT -5) 3 Comments

Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: FED SETS UP THE NFP
• EUR/USD: WILL THE ECB MAKE A MOVE?
• GBP/USD: THE BIG DECISION
• AUD/USD: RETAIL SALES HAMMER RATE HIKE EXPECTATIONS
• USD/CAD: RATES TO STAY PUT
• NZD/USD: UNEMPLOYMENT FOR TONIGHT
• USD/JPY: EMERGING MARKETS LIGHTEN RISK LOAD

EXPECTATIONS FOR UPCOMING FED MEETINGS

U.S. DOLLAR: FED SETS UP THE NFP

The Feds decision to reaffirm its interest in keeping rates exceptionally low was received well by the currency markets. The dollar was left to face the brunt of the decision, losing out against all majors except for the Japanese yen. The greenback declined the most against the euro in about two months by 1.03 percent, even as stocks posed a late-day retreat. Furthermore, the pound was a big gainer as traders seem to be finding more promise behind the ECB and BoE rate decisions for tomorrow. Each of the commodity dollars took their share from the dollar’s fall. The end of the Fed decision has set up the Non-Farm Payroll report for later this week, which will be a critical factor in keeping the risk trade afloat.

Exceptionally Low Levels

The long anticipated Federal Reserve Meeting has finally come, but produced little in terms of new developments. The big speculation going into the meeting was that the Fed would drop the phrase that indicates that they will keep rates at an “exceptionally low level, for an extended period.” Unfortunately this was not the case, and for the most part, the statement from the November decision was pretty much the carbon copy of the September decision, except for a few subtle changes. The Fed noted that financial market conditions are roughly unchanged, which was pared back from last month when they mentioned that markets had improved further. In addition, the Fed noted that they will only be purchasing $175 billion of agency debt, less than the previously mentioned $200 billion cap. Aside from these slight changes, the Fed’s concerns remain largely the same in that even though spending is improving, it is being constrained by a myriad of factors that include “ongoing job losses, sluggish income growth, lower housing wealth, and tight credit”. In addition, businesses continue to reduce fixed investment and inflation remains subdued due to “substantial resource slack.” The one outstanding factor that was not addressed is what they plan to do now that they have stopped purchasing Treasury securities. Nevertheless, the inclusion of the famous “exceptionally low levels phrase” will probably be a staple of future statements, as its removal would suggest that the Fed would be moving toward a hawkish bias. This is something we will definitely not see until the employment market makes a convincing recovery.

Key Indicators for Non-Farm Payrolls

Today saw the release of three key reports that usually have implications for the health of the critical US Non-Farm Payrolls report. The first, and most important of which, was the Service sector ISM report. As a real shock to markets, the report actually declined despite expectations that the industries would expand further. Even though the figure managed to remain above the 50 expansion level for the second straight month, the real cause for concern was that the employment component slipped 3.2 points to 41.1. This figure is our most trusted leading indicator for jobs and its decline makes it hard to support expectations for employment to show a comeback this month. The Institute for supply Management noted that respondents are in ‘wait and see’ mode, which explains the hiring hesitation. ADP also released its report today which showed a decline of 203,000 private sector jobs. Even though this showed a slight improvement over last month’s dismal 254K decline, it was still below estimates and therefore takes a bite out of NFP optimism. Finally, there was the Challenger Layoffs figure which was the most promising of the bunch, indicating that firings have subsided by 50.7 percent. These indicators are met with a very upbeat Manufacturing ISM that was reported on Monday and showed that its employment index actually improved. In total our indicators were relatively mixed which supports a growing conclusion that the unexpected expansion in third quarter growth was driven by productivity enhancement, not new hiring efforts. In this light, NFP is doomed to shed at least 100K jobs in the month of October.

EUR/USD: WILL THE ECB MAKE A MOVE?

The euro is seen dominating the dollar in today’s session on hopes that the ECB starts to give markets an indication on how and when they will start unwinding unconventional monetary policy. Data from today largely confirmed the general economic improvement as shown in Monday’s Manufacturing PMI. Today’s Euro-zone services purchasing manager index indicated that the sectors activity has expanded at the fastest rate in two years. However, even though Germany’s and France’s indicators remained above the 50-line, neither beat economic estimates. Nevertheless, the picture that has been painted over the last week is indicative of the improvement that might justify the large gains in the euro over the past few months. However, Producer Prices, despite being largely ignored by euro bulls, declined for the ninth consecutive month on a yearly basis. From last month, producer prices fell to -0.4% from 0.5%. The threat of consistently low prices is just one of the issues that the ECB will be considering at tomorrow’s meeting. Even though much of the emphasis for tomorrow’s schedule has shifted to the BoE’s decision, it is important not to count the ECB out. There is a growing possibility that the bank may formally discuss their plans to make an exit from some extraordinary measures like the 12-month loans that provide an unlimited amount of cash to the regions banks. The ECB’s Weber himself pointed out last week that there was the possibility of such a move. However, even though the announcement is expected soon, it is hard to pinpoint when the ECB will actually publicize its conclusions. Despite Weber’s comments, there is still the latest ECB lending survey which pointed out that credit crisis has not yet fully reversed itself. Nevertheless, it will be one thing to keep an eye on. To compound tomorrow’s frenzy, we will also be receiving Euro-zone Retail Sales.

GBP/USD: THE BIG DECISION

Traders are breathing some life back into the pound as the Bank of England’s rate decision quickly approaches for tomorrow. Pound strength may have been founded on two pieces of economic data that, combined with some other indicators, may have the ability to sway tomorrow’s decision. The first of which is Services PMI which reached the highest level since before the credit crisis started. This promising new release follows the very optimistic Manufacturing PMI that was produced on Monday. The second of today’s releases was Nationwide Consumer Confidence which has managed to reach an 18-month high. With house prices climbing, consumer confidence growing, and services and manufacturing improving, it begs the question of whether it will be enough to offset the negative effects of third-quarter GDP. According to current estimates, the answer is probably not. The BoE probably views the 0.4% decline in third quarter growth as the clearest indication that their efforts have not been effective. Expectations are deeply rooted in the BoE tagging on an additional £50 billion to quantitative easing programs. A move of such magnitude would clearly signal that the oldest central bank is behind the curve as most others are contemplating an exit. The last time the bank made an addition to QE was in August, when frenzy erupted on the news that Mervyn King dissented in favoring a larger expansion. In addition to tomorrow’s rate decision, we can also expect Industrial and Manufacturing Production.

AUD/USD: RETAIL SALES HAMMER RATE HIKE EXPECTATIONS

All commodity currencies are experiencing some gains, with the kiwi higher for the third straight day. Australian Retail Sales offered a big disappointment to chances for another consecutive RBA rate hike. Sales actually declined by 0.2 percent, after rising 0.9 percent last month. Indications of a weak consumer have spurred speculation that the RBA will have their hands tied at their next meeting. Markets are producing 50/50 odds that the bank will take rates higher in December. After making the obligatory 25bp hike yesterday, RBA Governor Stevens noted that the combination of several forces, including the significant rallies in the aussie, allows him to more ‘gradually’ take rates higher. This is a bit of a departure from last month’s urgency to take the benchmark off of historical lows. Furthermore, it is important to note that the RBA has never raised rates in three consecutive decisions. Building Permits were also released today and showed a substantial 2.7% climb over last month. However, the cause is predominantly the result of first-time home buyer grants which have boosted housing demand. We will receive both the Trade Balance and RBA’s Monetary Statement for tomorrow. The Bank of Canada’s Deputy Governor John Murray was recently reported as reiterating the fact that rates will remain at their historic lows until the second half of 2010. Murray also reaffirmed the banks discontent with the strengthening loonie. Canada will be producing the Ivey PMI for tomorrow. New Zealand is set to release their employment report for tonight.

USD/JPY: EMERGING MARKETS LIGHTEN RISK LOAD

The yen has weakened against most of its counterparts, with USD/JPY heading higher for the third straight day. Corresponding with the yen’s recent decline has been a steady downward drift in the VIX, an index that has consistently shown a high correlation with yen fluctuations. The Bank of Japan’s Shirakawa recently made comments pointing to the recovery in certain emerging markets as reducing key risks for the Japanese economy. Even though this is a good sign, it should have little to no effect on the bank’s decisions going forward. The big release for tonight is the Minutes from the BoJ’s last meeting. Since the bank recently decided to put an end to both purchases of commercial paper and corporate bonds, it may add emphasis to whether the minutes will reveal any other plans or deliberations that the bank might consider going forward. Other than the minutes, the rest of the week should be fairly quiet of data except for Friday’s Leading Index.

EUR/GBP: Currency in Play for Next 24 Hours

EUR/GBP will be the currency pair in play for tomorrow. We can expect loaded schedules for each country. For the UK, Industrial and Manufacturing Production will be released at 4:30 am ET or 9:30 GMT, followed by the critical BoE Rate Decision at 7:00 am ET or 12:00 GMT. The Euro-zone will provide Retail Sales at 5:00 am ET or 10:00 GMT before the ECB’s Rate Decision at 7:45 or 12:45 GMT.

EUR/GBP remains within the Bollinger band sell zone as uncertainties for tomorrow’s joint central bank meeting has kept the pair relatively unchanged. EUR/GBP is lingering right above a key support level at 0.8905. This happens to be the 50% retracement from the June 22 ^nd low to the mid-October high. Furthermore, it also has psychological backing as 0.8900 lies right below. On the way up, the pair could face resistance from the 38.2% retracement at 0.9205 from the same retracement. Even though it is uncertain how traders will react to tomorrow’s meetings, we can still expect a large amount of volatility in the pair.

Comments (3)

TomO

November 04, 2009 at 04:54 PM ET

Hi Kathy

How to use the OIS data to predict whether the central bank will adjust the interest rate. I read some post from bloomberg, it sometimes mention OIS when comes to bank interest rate decision, how to use this data and where I can get the real time data liks OIS for AUD or OIS for USD etc

Thanks

DJFX

November 05, 2009 at 06:19 AM ET

Kathy,

With the recent shift in dollar sentiment suggesting greenback strength, do you suspect the NFP announcement will show a dollar rally and then turn around and decline as has been the pattern in the last several announcements or do you see an accelerated and lengthy rally this time, or perhaps even an accelerated depreciation in the single unit?

kbb

November 05, 2009 at 11:02 PM ET

Hi Kathy,

Hope you had a great vacation downunder. I have a question regarding the NFP to be traded tomorrow. As your article indicates the NFP will probably disappoint. So on dollar based currencies do you see it being trade as an inverted V of the past months? in that there will initially be risk aversion strengthening the dollar, but after the market settles down it will reverse becoming risk positive.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.