The October ADP shows a rise of 58,000 in U.S. private payrolls, almost consensus forecasts of 54K. The figure follows August’s plunge to 38K. The last three releases of the report have shown improved record in predicting the direction in Friday’s release of non-farm payrolls. The 58,000 increase in private payrolls suggests an increase in non-farm payrolls to about 80,000, compared to consensus forecasts of 98,000. The wildcard factor will be government jobs, which fell by 28,000 in September, registering their third monthly decline. The Jun-Aug declines in government jobs were the first three-month declines since 2003, when the Fed was in the midst of an easing campaign.
We will adjust our NFP forecast after this morning’s ISM services release.
The 10 am release of the services ISM is seen at 54.6 from 55.8. The employment component of the survey will be closely watched as it too has shown a strong positive correlation with the non-farm payrolls so far this year. The employment index plunged to 47.9 in August from 51.7 in July, its first showing below 50 since June 2003. Unlike other components of the ISM survey, the employment index has only dropped below the 50 level during times of considerable economic weakness and Federal Reserve easing. Scrutiny will also be shown to the prices and new orders components.
Euro stabilizes despite PMI, but losses seen ahead
A sharp drop in the Euro zone’s services PMI to 54.2 last month from 58.0 in August is the latest sign of falling confidence in the region. The decline was most pronounced in Germany, where the PMI fell to 53.1 from 59.8, the largest single-month drop in its 10-year history. This suggests that the impact of the credit market fallout was mostly felt in German financial institutions, affecting their profitability and outlook.
Business Europe, a leading pan-European business lobby is the latest to express concerns with the strengthening euro indicating a "pain threshold for European companies" urging and U.S. politicians to press Japan and China to reevaluate their currencies at this month’s G-7 meeting. We do not expect the official G-7 communiqué specifically to address dollar weakness/euro strength because the G-7 meetings have constantly called for an “orderly adjustment of global imbalances,” of which a dollar decline is an unspoken but required development. The communiqué is expected to reiterate calls for greater flexibility in China’s currency regime, while adding the generic remark that “exchange rates should reflect economic fundamentals” and that it continues, “to monitor exchange markets and cooperate as appropriate.” When all said and done, we expect the outcome to temporarily stem the dollar’s decline and/or cap the euro’s appreciation.
The resulting retreat in the euro following the dismal PMI survey proved modest as EUR/USD drifted near the 1.4170. We expect the pair to post further declines in the session, reaching 1.4145-50. Subsequent support stands at the four-week trend line of 1.4120. Upside capped at 1.4200.
USD/JPY breaks 116, targets 116.50
USD/JPY breaks the 116.20 resistance and may extend gains towards 116.50 as dollar sentiment improves at the expense of emerging evidence of a slowdown in Europe. Despite yesterday’s noted deterioration in U.S. pending home sales, the dollar held relatively steadily as traders begin look for the consumption impact of the housing slowdown, an occurrence that has not yet taken place. Gains are capped at 116.50. Support seen climbing to 116, followed by 115.70.
Sterling eyes $2.03
Sterling hits a three-day low at $.2.0337 after UK services PMI slowed to 56.7 in September from 57.6, the lowest level since August 2006. Markets had expected a more modest decline to 56.8. The survey follows weak surveys manufacturing and construction. There are increasing calls from British business lobbies such as the CBI and BCC for the Bank of England to cut interest rates.
We expect sterling to continue struggling to hold above $2.04 level and that emerging gold weakness/dollar reprieve ahead of Friday’s payrolls will accelerate sterling’s losses and target $2.0320 as early as today. Speculation of a possible BoE rate cut this week may also increase defensive sterling positions. We expect as much as a 40% chance of a BoE easing this Thursday. Yet even in the event of no rate cut, we continue to expect the currency to register considerable declines in the case of a better than expected U.S. non-farm payrolls report in Friday.
Support stands at $2.0350, followed by 2.0320. Key foundation stands at 2.0270. Upside capped at 2.0420.
Ashraf Laidi Chief FX Analyst CMC Markets US
a.laidi@cmcmarkets.com
