Will U.S. Jobs Report Lash the Buck?

A new month and a new quarter should not be capable of changing things up too much. Both forex volume and volatility are not expected to ease off anytime soon as a hint of rate divergence brings with it a lot more opportunities. Hitting the halfway mark of a busy week, one notices that European bourses are inching lower, causing the previous session’s rally to pause after being driven by a fall in eurozone inflation to a five-year low. Some investors expect the European Central Bank (ECB) to be more proactive at tomorrow’s monetary policy meeting as a result.

On reflection, popular thought has ECB policymakers taking time to access the impact of the two waves of stimulus programs introduced last June (negative deposit rates, more credit, and purchases of asset-backed securities and covered bonds). Hence, most forecasters do not anticipate the ECB will jump the gun, believing that when it comes to inflation, the “base effect” (food and energy prices which are historically very low) will climb in October.

Nevertheless, eurozone inflationary pressures are likely to remain soft for some time. Sentiment surveys released earlier this week revealed that both euro businesses and consumers are more downbeat about their prospects in September than at any time since the end of last year. The 18-member single currency is once again threatening to print fresh new lows outright (€1.2580) and against the majors after a mixed-run of final September European manufacturing purchasing managers’ indexes (PMI).

In contrast, the U.S. dollar seems fixated on continuing its recent strong form, backed by the growing strength of the American economy. This is allowing investors to bet that the Federal Reserve will soon have to consider raising interest rates. However, a weak private sector jobs report later this morning (+207k is expected) could leave the USD exposed and vulnerable to a pullback. Any signs of U.S. economic weakness could influence the Fed to change-up the timing of its first rate hike, requiring many investors to unravel a good percentage of recent dollar rally trades.

Eurozone Activity Slows Apace

The eurozone manufacturing sector slowed more sharply than first estimated last month (50.3 versus 50.7), especially in Germany and France while Italy, Europe’s third-largest economy, shows a surprising revival.

New signs that the region remains stuck in stagnation, while manufacturers cut prices for the first time in six months, will only put further pressure on the ECB to be aggressive in taking more dramatic measures to boost euro consumer demand and inflation.

Certainly not a natural support for immediate EUR strength is Germany, the region’s backbone, which saw its manufacturing sector record weakness as its PMI fell to a new 15-month low, indicating activity had declined. Analysts have noted that the eurozone’s northern industrialized regions are succumbing to “the various headwinds of weak demand, falling business and consumer confidence, and waning exports due to the Ukraine crisis and Russian sanctions.”

This morning’s data suggests that eurozone manufacturing activity will not be turning around anytime soon with new orders on the slide, and export orders rising at the slowest pace in two years. The knock-on effect will suppress the hiring of additional workers and induce the slashing of product prices.

Whatever the ECB policymakers decide, the market should expect it to be more “contentious and audacious” in nature, especially since President Mario Draghi said that the bank could use additional unconventional measures.

Eurozone Woes Impact the U.K.

The U.K. is faring a tad better despite activity in the manufacturing sector slowing again last month. The PMI for the sector has fallen to a new 17-month low (51.6 versus 52.2), stronger proof that the upsurge in U.K. manufacturing witnessed in the first half of the year seems to have run its course. This could very much begin the change of thought for the Bank of England (BoE). Governor Mark Carney will have to consider whether the U.K. economy is strong enough to withstand a rise in interest rates.

The headline print came in below market consensus of 52.2 as new orders slowed for the third consecutive month, while output price growth remains weak. Input prices fell for the first time in five months, due to lower commodity prices and a stronger GBP. The hint of a slowdown and subdued price pressures may mean that the BoE rate rise will be delayed. Cable initially managed to fall a quarter-cent to test £1.6162, which is the September 15 low. Further stop-losses are reported sub-£1.6160 with a new euro resistance level reported above £1.6225-30. Sterling bears’ medium target remains the pound’s 10-month low straddling £1.6052 last visited on September 10.

Asian Liquidity Drought

Do not underestimate the power and draw of liquidity. Over the past session, Asian markets have been generally flat on low liquidity. With Hong Kong crippled by a weeklong pro-democracy protest, and Chinese holidays in full swing, market interest will remain relatively dead in that region, at least until U.S. nonfarm payrolls is published on Friday. It is the beginning of a new quarter, and despite the subdued trading expected for the balance of the week, both volume and volatility will allow for more market and trading opportunities. Meanwhile, China’s manufacturing PMI is holding steady, registering at a reading of 51.1 for September. Though the data won’t incite investors to react, it does help to calm pre-release jitters about the state of China’s economic recovery.