NZD Crushed by Data, USD Hangs Tight Ahead of Fed Speak

This may be an important week for the U.S. dollar but so far we have seen very little consistency in the performance of the greenback. The Non-farm payrolls report is not due until Friday and even though Wednesday's ADP and ISM non-manufacturing index will help shape expectations for the labor data, the uncertainty surrounding payrolls, the unemployment rate and average hourly earnings prevent investors from getting too excited before the main release. We've seen non-payrolls go in a completely different direction from ADP or ISM and we've also seen average hourly earnings or the unemployment rate trigger a U-turn after the initial reaction to payrolls. So traders are rightfully skeptical about whether the labor market report will confirm the Federal Reserve's hawkish bias until the actual report is released. At the same time, there's a lot going on abroad and non-dollar flows are dictating the direction of currencies for the first few days of the week. The most important focus over the next 24 hours will be Fed speak as we have talks from Yellen, Fischer, Dudley, Harker and Brainard.

The euro traded lower against the U.S. dollar today and while it may be easy to attribute the currency's weakness to ECB President Draghi's comments, the decline in EUR/USD began during the European trading session. However the prospect of more stimulus will be a constant driver of EUR/USD weakness. Today Mario Draghi confirmed the central bank's willingness to act and reminded investors that in December, they will examine the need for additional monetary accommodation. Eurozone producer prices and revisions to the composite PMI index are scheduled for release on Wednesday. While interesting neither one of these reports are big market movers for the euro. The currency pair remains in a downtrend and poised for a move to the 1.08 handle.

Meanwhile the worst performing currency today was the New Zealand dollar. NZD fell sharply on the back of lower dairy prices and weak labor market numbers. Dairy prices fell 7.4%, the largest decline in 3 months while the unemployment rate rose to 6%. Economists were looking for employment to rise by 0.4% but instead it fell by the same amount. The participation rate also dropped to its lowest level since Q4 of 2013 while private wages and average hourly earnings slowed. These reports reinforces the Reserve Bank's concern about the sustainability of the stabilization in dairy and keeps the door open for another rate cut from the RBNZ.

The Australian dollar on the hand performed very well following the Reserve Bank's decision to leave rates unchanged. While the RBA expressed concerns about low inflation and below trend growth, as our colleague Boris Schlossberg reported, the statement "sounded a decidedly more hawkish tone noting that financial market volatility had improved over the past month. While the RBA acknowledged that conditions in China suggest further softening, the slowdown in Asia was partially offset by continuing growth in US and recovery in Europe. The central bank also dismissed concerns about the recent rise in mortgage rates noting that credit conditions remain accommodative." Retail sales, PMI services and Australia's trade balance report are scheduled for release this evening along with Caixin's China PMI Composite Index.

After a one-day respite, USD/CAD resumed its slide. Oil prices continue to be the primary driver of the Canadian dollar. The price of crude rose more than 4% intraday on concerns about Libyan and Brazilian production. With weaker Chinese growth capping prices and production problems limiting the decline, we expect oil to remain confined within a $42-$50 trading range. Canadian data on the other hand will most likely be weaker starting with tomorrow's trade balance report. Between the drop in the IVEY PMI index and the low level of oil prices in September, we expect a wider trade deficit for Canada.

Despite the lack of U.K. data, the British pound saw quite a bit of intraday volatility. The currency pair traded to a low of 1.5360 before turning around during the North American session to end the day in positive territory. Sterling's price action suggests that investors are hopeful that the Bank of England will remain on track to raise interest rates next year. Whether that happens will depend in part on tomorrow's PMI numbers. Manufacturing activity accelerated sharply in October and an improvement needs to be seen in service sector activity for GBP/USD to retest 1.55 pre-BoE because growth in the construction sector slowed slightly according to this morning's report. We don't anticipate a sustained break of 1.55 in GBP/USD until the Quarterly Inflation report is released because given the number of times the currency pair tested this level, a major catalyst will be needed to clear the stops.