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USD: Stronger ADP Means no QE3 but FOMC Still Key

Last updated 11/2/2011 8:31 AM ET (GMT -5) 1 Comments

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Kathy Lien

Director of Currency Research, GFT

There are a number of important event risks on the calendar this week and one of them will be this Friday's non-farm payrolls report. The leading indicators for payrolls have begun to roll in and according to the Challenger and ADP reports, job growth continued to recover in the month of October. Challenger Grey & Christmas reported only a 12.6 percent rise in layoffs last month which was the smallest increase since June. According to payroll provider ADP, 110k private sector jobs were added last month. Although the Challenger and ADP reports have done a poor job of forecasting payrolls in recent months, the lack of red flags in this morning's labor market numbers will be enough of a relief to the Federal Reserve who will be making its monetary policy announcement in just a few hours. No news may be good news for the U.S. but with MF Global imploding, 2,870 employees are at risk of losing their jobs. Of course not all of these jobs are based out of the U.S., but combined with a recent layoff announcement from Credit Suisse, job cuts could still grow in the coming months. 

Although the Greek saga remains in the spotlight with headline news causing volatility in the euro, the highlight of the day is the FOMC rate decision. Safe haven flows have eased out of the dollar this morning but the market's appetite for the greenback could change if the Federal Reserve introduces a new round of stimulus this afternoon. The Federal Reserve is not expected to launch QE3 just yet but they could alter their communications strategy or signal plans to do so. Recent comments from Fed officials suggest that they are warming to the idea of more stimulus but given the better tone of US data, their next move will most likely be another middle of the road approach so they can reserve QE3 for a time when the markets are down 20 and not 5 percent. 

When it comes to changing their communication policy, the Fed has a few options:

1.            Release Economic Forecasts and Forecasts for Fed Policy

2.            Set Inflation Target

3.            Pledge to Keep Rates Low Until Unemployment Falls below a Certain Rate

There is a great deal of urgency within the central bank to increase transparency on monetary policy but it is a challenge for policymakers to agree on specific targets. Nonetheless, this is still the Fed’s preferred option over expanding the balance sheet. The central bank has pledged to keep interest rates at exceptionally low levels through mid 2013. They could choose to extend this period by a few more years, which would hurt USD/JPY but probably not as much as a target for inflation or the unemployment rate. A more aggressive approach would be Chicago Fed President Evan's suggestion of officially keeping rates at extremely low levels until the unemployment rate falls below 7 percent or inflation rises above 3 percent. Explicit unemployment and inflation targets would be almost as bearish for the U.S. dollar as QE3. The Fed could also bite the bullet and expand their balance sheet (QE3) which would send the greenback sharply lower but the chance of it happening this week is slim. If they do nothing at all, USD/JPY could rise but that will also depend on how sharp the central bank's downgrades GDP growth.

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Comments (1)

mbrad77

November 02, 2011 at 11:50 AM ET

could you please emphasize in an article the difference between the ADP number and the the official number from BLS ?

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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.