The U.S. dollar retreats after the 23,000 decline in the February ADP survey on private payrolls emerges as a more despondent showing than the expected increase of 10,000. The ADP survey’s effectiveness in predicting private payrolls has been significantly misleading over the past three months, which implies that an upside surprise in today’s release (greater than the 10,000 forecast) is unlikely to trigger a material reaction in currency and fixed income markets. Private payrolls make up 85% to 90% of the total payrolls. Recall the January ADP signaled an increase of 126,000 private sector from 42,000 in December, well below the 1,000 jobs reported by the Bureau of Labor Statistics. The 1,000 increase was for private payrolls while the overall figure stood at -17,000. Accordingly, we’re more likely to see a negative dollar reaction to a weak figure (consensus forecast at 10,000) than prolonged upside in the event of a strong figure, which was far from the actual case today.
The services ISM is expected to have edged up to 47 in February from 44.6 in January, which was the lowest since March 2003. The rebound is unlikely to cause any substantial dollar recovery as it remains below the 50, indicating contraction. Renewed yen gains are seen in the event that both the employment and new orders indices post the second monthly reading under 50.
Factory orders are expected to have dipped by 2.0% in January from the 2.0% rebound in December.
The Beige Book survey from the 12 district banks should tell a broadly more downbeat story than the January survey, which noted that “economic activity increased … at a slower pace compared with the previous survey period.” The importance of today’s survey is diminished by the gloomy assessment communicated by Federal Reserve Bank Chairman Ben Bernanke in his last two testimonies as well as the Fed’s latest negative revisions for GDP and unemployment.
Yen pullback stabilizes after ADP
The yen remains weak after yesterday’s turnaround in Wall Street emerged on more comforting remarks, though insubstantial, a workout plan for bond insurer Ambac. But renewed weakness from the U.S. data will likely boost the Japanese currency across the board as has been the case in previous releases. The services ISM report will be largely scrutinized for whether its employment component deepens into contraction territory (below 50), which may suggest further weakness for Friday’s payrolls report.
USD/JPY attempts to break its five-day losing streak but faces key trendline resistance at 103.90-95. An unlikely rise above 50 in the ISM would be instrumental in lifting the pair above the 104 figure, extending to 104.20. Fading momentum signals a retreat towards 103.50 and 103.20.
Euro eyes $1.5230s
Euro zone retail sales rose 0.4% but fell -0.1% year on year in January due to notable slowdowns in Spain. The Euro zone services PMI rose to 52.3 in February from January’s 50.6, in line with expectations. Both Germany and France registered increases in their PMI in contrast to Italy.
Although euro’s momentum has eased over the past five days, EUR/USD remains firmly above the 1.5150 support, awaiting the latest indications from U.S. data and whether they support the case for a 75 basis point rate cut at the FOMC March 18 meeting. The U.S. 10-year/two-year spread has widened to 200 bps, indicating at least 100 bps more in rare cuts before end of June.
EUR/USD eyes interim resistance at $1.5220, but selling is seen emerging at 1.5245-50. Support stands at 1.5155, backed by 1.5120.
Sterling gaining to $1.98 on U.S. weakness
The rise in UK’s Services PMI to 54.0 above the 52.0 forecast helped stabilize sterling’s pullback to $1.9730. Persistent reports of rising UK inflation from the British Retail Consortium’s shop price index are largely a result of rising food prices, without which non-food retail have fallen for the fifteenth straight month. The data will likely keep the Bank of England at bay at tomorrow’s interest rate decision, but cable may extend its declines, especially amid the retreat in gold.
But the weaker than expected -23,000 decline in the ADP should help boost cable above $1.98, facing resistance at $1.9820, followed by 1.9860. Support climbs to $1.9740.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.com
