Poor Non Farm Payroll report leads dollar bulls to retreat as prospect of tapering this year diminishes.

Tom Tong23/Oct/2013Currency Updates

GBP

Sterling catapulted against a diving greenback, maximising leverage from disappointing U.S NFP and the lasting effects from the debt ceiling fallout. Trading was a whisker away from last Fridays highs which were the strongest levels we have seen since October 3rd. The rally was self perpetuating for further gains in sterling, strong GDP growth is called for Friday. Yesterdays upward lift will encourage more investors to back the pound ahead of a probable further rise if GDP is solid.The Euro continues to ride high against the pound following it’s impressive ascent over the past weeks. The Euro is trading at remarkably high levels across the board.

There is a increasingly bullish sentiment towards U.K GDP figures which are due to drop Friday. Excluding the occasional slip, over the past weeks all the data points to U.K growth continuing its march towards a strong recovery and improving growth prospects. 0.8% growth is called for the third quarter, this would be the highest increase all year and would steer year end growth towards 1.5% overall growth.

Strong growth figures will fuel the ongoing speculation over when the BOE will tighten monetary policy. The disparity between the markets view compared to the BOE is significant. The market expects the BOE to tighten monetary policy a year before they have stated. Further strong macro data releases would likely fully cement this view. The barometers for change in policy are interest rates, unemployment and inflation. Interest rates are frozen, unemployment is falling quickly and inflation is rising. This all creates an environment in which tightening of policy is inevitable. However in the short term we are highly unlikely to see any change, next year looks far more reasonable for changes to take place.

Data releases of note today include mortgage application we also have voting at the BOE over the monetary policy approach.

EUR

The Euro continues to display notable staying power at it’s current remarkable trading levels. The highs also prove the claims over the past year that it was a clearly undervalued currency. The Euro is currently trading at a 2 year high against the dollar, a 4 year high against the Yen and hovering near quarterly highs against Sterling.

The gains have morphed from a series of extraordinarily well timed events which have all tipped the market in the Euro’s favour. Firstly we have seen continued strong data across the Eurozone. This is the first time since the recession that the recovery appears to captured both the stronger and weaker nations. This increases market confidence that the E.U recovery is not restricted to the stronger nations.

Secondly we have seen consistent clear and understandable forward guidance from the ECB governor Mario Draghi. This has abated market fears that a sudden change in monetary policy is possible. Such a consistent approach from the central bank naturally increases market confidence.

Thirdly we have seen an Emerging Market slowdown and U.S debt ceiling crisis. This has eroded investor confidence in the U.S and emerging markets. Therefore we see a pullback in investors exposure to both these markets as they pull money and diversify into the Eurozone. The capital flights leads investors to snap up hard Euro currency and E.U stocks therefore increasing liquidity and market confidence and pushing up the currency and E.U denominated assets.

For the rises to continue we must see universal positive data across the board, naturally uncertainty in other markets will further benefit the Euro.

Data releases of note today include consumer confidence.

USD

Dollar bulls are in retreat. For much of the past year investors have been making noises that the next big market trend would be a dollar phoenix like rise. This now looks massively offside. The U.S currency has emerged as the biggest victim of the drama in Washington over the debt ceiling. The dollar has been punished from the fallout and has fallen against almost all leading currencies and remains near an eight month low against a basket of its six main rivals. The dollar index is also hovering near its lowest level all year. Yesterday saw the release of U.S NFP. After the market was starved of proper macro data over the shutdown the scene was set for a spectacular curtain lift. The data dropped and immediately we saw a huge dollar sell off as it crashed against the Euro and Sterling alongside its most traded pairs.

Non farm payrolls came in at 148k, significantly lower than 160-180k which was widely called. This is also during a time that U.S labor market participation numbers are their lowest since 1986. The trend in payroll growth has slowed, despite strength in several proxy indicators. the next 2 employment reports will be compromised by shutdown effects, surely now tapering for this year is entirely off the table, any alteration in policy would be madness. Even next March will be a struggle unless data is incredibly strong early next year.

Somewhat paradoxically, US stocks celebrated the payroll disappointment by rising to new all time highs, dragging most world indices higher as well. The prospects for continued open-ended monetary stimulus from the Fed apparently is considered more important than the slowness of the recovery in the US labor market. The dollar will need strong data releases in the future to retrace these gains.

Data release of note today includes Mortgage applications, import and export price index and housing price index.

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Written by Tom Tong

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