Nov. 3, 2006 - Dollar lower across the board after higher than expected Canadian jobs (see more below) and caution that today’s U.S. jobs report may not prove sufficient in altering the market’s increasingly dovish stance (expectations for a first quarter Fed cut). We expect a neutral- negative USD reaction to our forecast of 130,000 in payrolls, increase to 4.7% in the unemployment rate and 0.3% rise average hourly earnings.
Payrolls hold fate for $1.2830 euro
Today’s non farm payrolls are seen as the key determinant in shaping euro’s momentum towards the $1.28 figure and the September high of $1.2830. The interplay between payrolls, average hourly earnings and the unemployment rate will be crucial. But traders should also keep an eye on any major upward revisions in the September figure, which had initially come in at 51,000. Our expectations of a rise in the unemployment rate to 4.7% from 4.6% and a 130,000 reading in payrolls should be dollar negative, especially with average hourly earnings growing by no more than 0.3%.
Euro zone unemployment was unchanged at 7.8% in September, matching the August rate, which was revised from 7.9%. This was the fifth consecutive monthly reading of 7.8%. Euro zone unemployment has been falling steadily to record lows, reflecting broad declines especially in France, Germany and Ireland.
The currency was bolstered by Thursday’s European Central Bank (ECB) press conference as bank presidents communicated the main ingredient for a December tightening, signaling “strong vigilance” to curb inflation. The December decision will be accompanied by the bank’s latest growth and inflation projections, which should further shape the medium-term direction.
Technically, EUR/USD shows signs of toppishness, seen dragging the pair towards the 1.2740. An upside surprise in payrolls (payrolls above 125,000, unemployment rate at or below 4.6 and average-hourly earnings at more than 0.3%) has the potential to call up 1.2740 and 1.2680.
But traders should also watch the October services ISM, which could be especially dollar positive if meets expectations of a rise to 54.7 from 52.9 and if the prices paid index remains above 50, following September’s 56.7. A drop below 52 and a sub-50 prices index could help temper any dollar gains emerging from an upside surprise in payrolls.
Yen little changed by China’s reserve tightening The Japanese yen is only slightly affected by China’s decision to raise commercial banks' reserve requirements for the third time in five months, as the measure further reduces chances of any currency-related changes in the future. The People’s Bank of China raised the reserve requirement for banks by half of a percentage point to contain excess liquidity. The increase raises reserve requirements to 9.0% for large state lenders and 9.5% for smaller lenders. The announcement reflects China’s clear path of cooling its economy by using market measures, rather than outright changes in its currency. The Interim resistance of 117.40 should be tested in the event of at least 150% in payrolls and a no change in the unemployment rate at 4.6%. Any figure above 180,000 to 90,000 and a rise to 0.4% in average hourly earnings could extend gains towards the 117.70 resistance (38% retracement). Downside vulnerable at 116.60, with 116.20 seen called up by further disappointment in the ISM—such as headline below 52 and prices paid under 50.
CAD steadies thanks to upside job surprise The Canadian dollar is receiving a much needed boost after the latest employment report showed the creation of 50.5,000 jobs in October, three times more than consensus forecasts. The unemployment rate dipped to 6.2% from 6.4%, defying expectations of a no change. USD/CAD tumbled from 1.1350 to 1.1290, but traders aren’t yet ready to call up the next support of 1.1270 until the U.S. payrolls hit the wires. This week’s tax trust levy as well as falling oil prices, has cast a negative spell on the loony, but the tug of war between the dovish USD and the tax hit CAD should help cap the pair at 1.1380. Upside surprise in U.S. payrolls seen testing the 1.1420. Support stands at the 61.8% retracement of 1.1245, followed by 1.1220.
Strong services PMI further boosts rising pound
Sterling maintains strength after more data evidence supports the case for a Bank of England rate hike. The Chartered Institute of Purchasing and Supply's services PMI index jumped to a six-month high of 59.3 in October from 57.0 in September, shattering expectations of a drop to 56.7. Although the prices index hit an eight-month low, the central bank will remain unhinged and raise rates to 5.00%. Yesterday’s strong figures in PMI construction and last week’s reported two-year high in annual house price growth have helped seal the deal for a November tightening. With indicators of consumer and pay inflation remaining unfazed, a January tightening is not yet ruled out.
Cable has shown signs of consolidation around the 1.9070s throughout the week, ready for a drop to as low as $1.90 in the event of an upside surprise in U.S. non farm payrolls. Initial support stands at 1.9030, followed by 1.9, with buying seen reemerging at 1.8965-70. Another payrolls disappointment should lift the pair towards the 1.9100 figure, which should transition into as high as the four-month high of 1.9135.
Ashraf Laidi FX Analyst CMC Markets US 140 Broadway, 30th Floor New York, NY 10005 (212) 644-4220 (212) 644-4222 faxa.laidi@cmcmarkets.com
