By DailyFX - US Dollar - Is the sell-off in the US dollar over? Probably not over the long term, but in the...

... short term, it could very well be over if tomorrows non-farm
payrolls release prints strongly.

The US dollar is finding support against most of
the majors except for the Euro, which has benefited from the surprisingly hawkish
comments from the European Central Bank earlier this morning. Despite another round
of mostly weak US economic data, the dollar is having a hard time falling further.
At this point, the market is no longer surprised by weak economic data, especially
from the manufacturing sector. Non-farm productivity, factory orders and jobless
claims all came out weaker than expected. The only upside surprise was in unit
labor costs which confirmed the similar rise that we saw in the Employment Cost
Index earlier this week. Although a rise in labor costs is inflationary, with
energy prices remaining very low and core prices following slowly, the Federal
Reserve is probably far more concerned about growth at the moment than they are
about inflation. Furthermore, whenever labor costs rise, it is also a burden for
businesses. Instead, tomorrows non-farm payrolls print will be extremely
important. With only 51k jobs created in the month of September, anything short of
a triple digit print will be perceived as very bearish for the US dollar. Analyst
estimates are all over the place with the highest forecast being 180k and the lowest
forecast at 72k; the median is 123k. Of the 76 analysts surveyed by Bloomberg, 20
percent of them are calling for a double digit print. We believe that it would be
quite disastrous to see anything less than 100k and judging from economic data has
already been released, this downside surprise will probably not materialize.
Jobless claims have been very low for the past month while the ADP payroll and
Hudson employment indices surprised to the upside. The only risk we see is from the
real estate and housing market. Construction activity has been falling and we are
sure that jobs related to that industry such as real estate agents and mortgage
brokers are also suffering. Either way, with the US dollar at a very important
support level, non-farm payrolls should help determine whether we will see a bit
more of a bounce or further losses.

Euro and Swiss Franc - The Euro was one of the few currencies that managed to
rally against the US dollar today thanks to very strong comments from ECB President
Trichet. Repeating that strong vigilance is needed to tackle inflation, Trichet was
also very confident about growth and weary about the upside risk to inflation. The
fact that he bypassed a rate hike today explains why the Euro only saw a modest
rally. At this point, a December interest rate hike is practically guaranteed.
However Trichet refused to provide much guidance beyond that which means next
months monetary policy meeting will really be the one worth watching. Stronger
economic data also helped the Euro register gains. The regions overall
manufacturing index increased from 56.6 to 57.0, led by improvements in Italy and
France. German manufacturing conditions was slightly weaker, but that was offset by
a sharp fall in unemployment claims in the month of October. Overall, the mixed
data that we have seen in recent weeks suggests that even though the Eurozone may be
vulnerable to growth in the US, so far, it is holding up fairly well on its own.
Meanwhile Swiss consumer prices were much weaker than expected in the month of
October. Headline prices increased by a paltry 0.3 percent, with the annualized
pace of growth slowing to the same pace from 0.8 percent reported last month. It
seems that the decline in energy prices has really hit consumer prices and given
that, do not expect a rate hike from the Swiss National Bank anytime soon.

British Pound - After six straight days of gains in the British pound, US
dollar currency pair, we are finally seeing signs of weakness. The pair is ending
the day unchanged despite a very firm construction sector PMI report. The economy
is continuing to do very well with the housing market leading the pack. Although
the currency pair appears poised for a turn, the combination of hawkish comments
from the central bank, continual merger and acquisition flow and strong data should
keep any losses limited. Service sector PMI is due for release tomorrow and the
risk is for an upside surprise similar to what we saw in the construction sector
index this morning.

Japanese Yen - Despite the lack of economic data, the Japanese Yen is continuing
to sell-off against the majors as the old battle between the Japanese government and
the Bank of Japan heats up once again. Traditionally the government holds the
central bank back from any actions that would reduce the stimulus in the economy.
Last night however, the tables seem to have turned as the Bank of Japan is the one
that is more relaxed about monetary tightening. Once again, the Ministry of
Finances Watanabe expressed concern about the value of the Yen and how
fundamentals do not warrant further weakness. The Bank of Japans Governor Fukui
on the other hand said that there is no need for the central bank to lift interest
rates too quickly. This is actually quite important since the Fukui is typically a
very aggressive supporter of higher interest rates. His relatively relaxed stance
will certainly keep carry trades in play for a while longer.

Commodity Currencies (CAD, AUD, NZD) The movements in the commodity currencies
are much quieter today. The Canadian dollar extended yesterdays sell-off after
the government announced plans to tax income trusts. There was no data released
today, but like the US, employment is due for release tomorrow. Payrolls growth is
expected to slow slightly from 16.2k to 15.0k, which would be yet another piece of
evidence that the fall in oil prices has been hurting the economy as a whole.
Interestingly enough, Australian data has taken a turn for the worse as both the
trade balance and retail sales came in much weaker than expected. This poses a
slight risk to the widely anticipated interest rate hike by the Reserve Bank next
week, which explains why the Australian dollar is down for the day.


Kindest Regards,

Kathy Lien
Chief Strategist
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: klien@fxcm.com

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