Dollar: Battered Bruised But Unsure

Yesterday’s disappointing employment report offered few favors for anyone, unless of course you happened to be a stalwart dollar bear. Even the dollars negative move has not been that convincing, sputtering and stalling while looking for other meaningful reasons to actually continue its immediate decent. The world’s primary reserve currency of choice is currently being held to ransom by option strangleholds. However, with investor apathy seeming to be the ‘new order’ and a dangerous one at that – it may not be long before traders and dealers actually call this quarter an opportunity lost and missed.

The September jobs report is providing an unclear picture for the world’s largest economy, increasing market expectation that Bernanke and his fellow policy makers at the Federal Reserve will keep their $85b a-month QE bond-buying program in place for the time being. In months past, the fear that the Fed was about to begin tapering led to a volatile summer of trading where Emerging Market currencies came under assault while the dollar found favor with the market. NFP was the market connection, watched intensely as a possible forecast of the Fed’s future policy intentions. Although December remains a possible contender for tapering to commence, yesterday’s weaker report makes it more likely that the Fed will push the first reduction in the pace of its asset purchases into 2014 – with March being touted as the most likely date.

The current state of affairs in the US is a contributing factor to risk-averse trading strategies dominating. That risk aversion sentiment is beginning to spread on overnight Chinese worries. The concern that the Peoples Bank of China may tighten cash liquidity to counter inflation has caused their own Money Market rates to jumps the most in three-months – a negative for risk strategies. Even China’s Premier Li Keqiang trying to talk down market concerns regarding government debt levels while investors await the formal findings of a state-sanctioned audit has done little to ease some of the fears. There are rumored reports circulating that top Chinese banks tripled their debt write-offs in H1 of this year – Are they cleaning up their books ahead of a new wave of defaults? This is certainly not an Asian confidence booster. The market has seen the AUD (0.9640) trade off its four-month highs (0.9740) – pushed there by Q3 inflation data and Yen gaining a bid (¥97.30) when the Nikkei fell -2%. The next data point for Asia will be the preliminary Chinese manufacturing data for this month, scheduled for release tomorrow. Last week’s growth data revealed a Q3 pickup in China’s economy from a slowdown earlier in the summer – tomorrows manufacturing numbers will be an early indication on the state of affairs for Q4.

The Pound is not alone (£1.6140); the flows witnessed during this morning’s Euro session would suggest that it might find it difficult to make much headway in the short-term. This is becoming more of a common argument amongst the major traded currency pairs, especially an issue against the EUR (0.8524), where better buying interest has been most evident now that the 17-member single currency has finally broken out of its current range and registered a new two-year high. The EUR outright pullbacks have been rather limited in nature thus far. Sterling only garnered fleeting support from this morning’s Bank of England Minutes, which showed growth expectations higher and employment lower in H2 of this year than previously forecasted. Recent polls suggest that there were an indication that plans for additional capacity and product development –in some cases put on hold since 2008-were being reconsidered due to a growing demand in confidence. The “Old Lady” also signaled that it might raise interest rates sooner (+0.5%) than it expected in August after Governor Carney and company agreed that jobless rate in the UK is falling faster than anticipated.

Governor Carney’s old firm, the Bank of Canada, announces their monetary policy decision later this morning. The market expects no change in rates and policy guidance (in line with consensus) from Governor Poloz, but the BoC should have a more dovish short-run economic outlook. This should be fundamentally bearish for the loonie, a currency that seems to have lost its correlation appetite to gold and oil (commodities) over the past few passive months. At current levels (CAD$1.0316), trading within its contained range (1.0250-1.0450) the weak USD trend is expected to dominate price action in the near term, resulting in neutral CAD outright price action.

Other Links:
NFP Provides “No” Support For the Dollar

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