The US dollar remains under relentless pressure ahead of jobs report

Highlights
The US dollar remains under relentless pressure.  Even though the ADP has tended to under under-estimate private sector job growth, the unexpected weakness reported yesterday is the latest catalyst for expectations of renewed asset purchases by the Federal Reserve.  The euro approached the $1.40 level before the market paused in Europe.   Slightly stronger than expected UK manufacturing output (0.3 vs 0.2) and the generally weak dollar environment is helping sterling edge toward $1.60, though as widely expected the BOE left policy unchanged.  Comments from Vice Finance Minister Sakurai acknowledging that Japan must learn to live with a strong yen seemed to encourage yen buying and the dollar reached new multi-year lows near JPY82.25.  Strong Australian jobs report sent the Australian dollar through $0.9900 as expectations for a rate hike build again. 

Asian stocks were mixed but more indices were up than down, after Australian employers unexpectedly stepped up hiring.  The MSCI Asia Pacific Index climbed by 0.5%, led by miners and raw materials.  And yet the countervailing force to the strong Australian data was the earnings report by Samsung –which missed analyst estimates.  The Nikkei 225 was down .07%, led by a drop in telecommunications and utilities, although financials and consumer services were up more than 1% on the expectations that the easing by the BOJ will spur domestic demand.  In Europe stocks were little changed as the as European economic reports were mostly soft and the markets await a decision from the ECB.  The Stoxx 600 Index was down by 0.02%, led by a decline in industrials and materials.  In addition, Renault SA sold a 14.9% stake in Volvo AB for €3 bln, leading to an outperformance of the Swedish Index.  And finally in the EM space to stem the flow of capital and slowdown currency appreciation, Brazil has extended the so-called IOF tax to cover equities as well. 

Japanese bond yields rose as the Ministry of Finance set the smallest coupon for 10-year debt in seven years, reducing demand at the latest auction.  In fact, 10-year yields rose 3bps, while the 2-year were flat.  India’s 10-year bonds declined for the fourth time in five days on speculation demand for existing securities will wane ahead of a debt auction tomorrow.  In Europe Spain sold €3.2 bln of three-year debt in the first bond auction since Moody’s Investors Service stripped the nation of its top Aaa credit rating.  According to the Treasury, the government sold notes due in 2013 at an average yield of 2.527%. The 10-year yield on the other periphery members rose slightly with Portugal’s yield up 7bps followed by Ireland with a 4bps jump. 

Currency Markets

Over the last three months, the ADP Employment report has under estimated the BLS initial estimate of private sector jobs growth by an average of about 59k.  The most was the 77k under last month.  However, even after making this adjustment, it would point to the risk of disappointment with tomorrow’s jobs report, in which the consensus calls for about 70-75k increase in private sector employment.  Although today’s weekly initial jobless claims are for well after the week that the employment survey was conducted, it will be watched closely.  That said, the weekly initial jobless claims generally improved over the month of September, though remain elevated around 450k.   While the market focus has been on the Fed resuming its Treasury purchases, there has been increased speculation, reflected in today’s Wall Street Journal article, that the Fed may target an interest rate and purchasing enough securities to ensure this.  There is also talk that the Fed may be considering a formal inflation target or lifting their informal one.  In addition, the ADP shock appears to have spurred talk about the possibility that the Fed does not wait until the Nov FOMC meeting to begin implementing its strategy.   Ironically, in the twelve months of the recovery, private sector jobs growth, as uninspiring as it has been, is better than the past two recoveries.   NY Fed Dudley already estimated that $500 bln Treasury purchase would be tantamount to a 50-75 bp rate cut, which itself is fairly aggressive.  An intra-meeting move would also be another sign of the Fed’s aggressiveness and determination.  With this backdrop, it is hard to envisage the US dollar gaining much traction today. 

The Bank of England left rates on hold as expected.  The minutes will be released on October 20, the same day the government is to unveil a more detailed plan of its spending cuts, entitled the comprehensive spending review (CSR). While much ink has been spilt on the diverse opinion at the Federal Reserve, the MPC appears split three ways and there is some talk that this may be reflected in the vote.  The center is on hold, but seemingly with a modest dovish tilt.  On the hawkish side is Sentance and given the resilience of price pressures and the risk that higher taxes keep the pressure on and some firm real sector data, he probably has not capitulated.  On the other hand is Posen on the dovish side, wanting to take more action.  After all, this morning’s Halifax housing price data were way below estimates.  In fact, the housing price index fell by 3.6% m/m in September, the largest drop in history.  However, this series tends to be volatile from month-to-month so therefore the MPC prefers to use the average of 3m/3m rate from the Nationwide and Halifax indices.

The ECB remains on hold, but, as usual, Trichet’s press conference is the point of interest.  There are two issues of note.  The first is the exit strategy that the ECB is committed to, but there seems that there might be some divergence of opinions.  Will Trichet weigh in either voluntarily or in the Q&A?  The second, and perhaps related to the first, is sharp decline in bank usage of the ECB’s 3-month unlimited funding.   Trichet will likely embrace this as demand driven rather than supply and that the ECB exit is following developments in the private sector not leading them. 

Australian employers in September added the most workers in eight months, driving the country’s currency toward parity with the dollar; in effect, supporting the case for future rate hikes by the RBA. The number of employed people rose much more strongly than expected in September, by 49.5k m/m, compared to a consensus of 20k.  In addition, full time employment rose by 55.8k.  The labor force rose strongly by 51.8k m/m, meanwhile the labor force participation rate rose to a record 65.6% from 65.4% in August, although this had little impact on the unemployment rate which stood at 5.1%.  Again, this strong data supports the case for the RBA to break its pause and consider a 25bps rate hike on 11/01.  Subsequent the release the AUD surged, inching closer to parity with the greenback.  With the likelihood of further easing of advanced countries on the way, the AUD looks primed to maintain its current strength. 

Upcoming Economic Releases

At 8:30 EST/12:30 GMT the US reports initial jobless claims for the week of October 2.  The consensus is for a small uptick to 455k from 453k the previous week, followed by continuing claims from the last week of September, which are expected to decrease by 7k. Canada reports Aug building permits at 8:30 EST/12:30 GMT.  The consensus is for a 2.0% drop from the previous month.  Fed’s Fisher (non-voter) and Hoenig (voter) speak around 13:30 EST/17:30 GMT and both are on the hawkish side.