The dollar firms as risk taken off the table ahead of non-farm payrolls tonight


MAJOR HEADLINES – PREVIOUS SESSION

  • US Sep. Challenger Job Cuts out at -30.2% y/y vs. -13.8% prior

  • US Aug. Personal Income out at +0.2% vs. +0.1% expected and revised +0.2% prior

  • US Aug. Personal Spending out at +1.3% vs. +1.1% expected and revised +0.3% prior

  • US Weekly Initial Jobless Claims out at 551k vs. 535k expected and revised 534k prior

  • US Weekly Continuing Claims out at 6090k vs. 6170k expected and revised 6160k prior

  • Us Sep. ISM Manufacturing out at 52.6 vs. 54.0 expected and 52.9 prior

  • US Sep. ISM Prices Paid out at 63.5 vs. 66.0 expected and 65.0 prior

  • US Aug Construction Spending out at +0.8% m/m vs. -0.1% expected and revised -1.1% prior

  • US Aug. Pending Home Sales out at +6.4% m/m, +12.1% y/y vs. 3.2% /12.9% prior resp.

  • JP Aug. Jobless Rate out at 5.5% vs. 5.8% expected and 5.7% prior

  • JP Aug. Household Spending out at +2.6% y/y vs. -0.2% expected and -2.0% prior

  • AU Sep. TD Securities Inflation out at flat m/m, +1.3% y/y vs. flat/+1.7% prior


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • UK Nationwide House Prices (0600)

  • UK PMI Construction (0830)

  • EU Euro-zone PPI (0900)

  • US Non-farm Payrolls (1230)

  • US Unemployment Rate (1230)

  • US Avg. Hourly Earnings (1230)

  • US Factory Orders (1400)

Market Comments:

It was a bad start to Q4 on Wall St as weaker US jobless claims and manufacturing ISM data overcame positive inputs from personal spending and pending home sales. Weekly jobless claims were a worse than expected, 551k vs. 535k, and the ISM manufacturing a disappointing 52.6 vs. 54.0. On the flip side, Q2 personal income rose 0.2% vs. 0.1% expected and spending +1.3% vs. 1.1%. The weakness on Wall St was mirrored by a rise in the dollar and firmer US bonds, with the 10-year yield dipping some 13bp on the day.

On the ISM data, a weak number may not have been too much of a surprise given the disastrous Chicago PMI reading a day earlier and no doubt the optimists will focus on the fact that it is at least still holding above the pivotal 50 expansion/contraction point.

Fed Chief Bernanke was out overnight commenting on the dollar, saying that he did not see an immediate risk of the greenback losing its status as the global reserve currency, but acknowledged the fact that its position dictates additional responsibilities on the US. This includes the need for the US to sort out its fiscal situation once a recovery is in place or run the risk of a weakening dollar (ermmm, is that not what we are seeing already?).
Treasury Secretary was also on the wires repeating his mantra that a strong dollar is important to the US.

As the dollar came back in vogue, its gains were more significant against those commodity currencies that had gained the most in the previous session, ie CAD and AUD. Early EUR weakness following Almunia’s comments on EUR strength at the G7 meeting was compounded by the risk aversion trade while GBP was buoyed initially by reported M&A demand, but soon retreated back to 3-day lows.

The early Asian session was dominated by an extension of the “risk off” trade, with the dollar gaining across the board. However, ahead of key support levels the trend stalled and as we head into the European open we are seeing some short squeeze happening. The Japanese data releases were surprisingly strong (though the market reaction was surprisingly non-descript, both in equities and FX). For the record, the unemployment rate dipped to 5.5% from its post-war high of 5.7% previously and 5.8% expected, though the jobs-to-applicants ratio held at a decade low of 0.42. Household spending also rose a solid 1.9% m/m and 23.6% y/y in August.

While it has been said that no “official” statement will be released at the G7 meeting, instead preferring to promote the G20 meeting as the economic strategy platform, yesterday’s comments by EU’s Almunia has cautioned that FX and the value of the dollar may be discussed with a heightened risk of comments and observations being released “unofficially”. The market is aware of this and it explains the more cautious risk stance into the weekend.

On the data front, the highlight will be US non-farm payrolls. Earlier surveys had suggested the market was looking for 175k job losses on the month. Since both the ADP report on Wednesday and initial jobless claims yesterday, airwaves have been abuzz with downgrades (bigger negative) to forecasts with some pushing as high as 250k. A small increase to the unemployment rate to 9.8% from 9.7% in August is also expected but a bigger than expected rate would bring the 10% level into view - certainly a psychological blow, even if everyone knows it is coming eventually.

Good luck and have a great weekend.