US Dollar Steadies Before Friday’s NFPs But Should We Expect Breakouts?

• British Pound Holds up Despite an Expansion of the BoE’s Bond Purchase Program
• Euro Shows Limited Response to ECB’s Slow, Hawkish Policy Turn
• Canadian Dollar not to be Overshadowed Friday with its Own Employment Data

US Dollar Steadies before Friday’s NFPs but should we Expect Breakouts?

The combination of tepid economic event risk and the looming presence of a key event indicator yet to come worked to stabilize the dollar through Thursday’s session. In contrast to the significant rally and breech of the 10,000 barrier for the Dow, the US currency was little changed and relatively stable throughout Thursday’s session. It is difficult to tell which was the better manifestation of underlying risk trends; but without a prominent and spanning catalyst to alter sentiment, it is reasonable to assume that the FX market was more attuned.

As for fundamental activity through the session, the most notable surprise would come from the ICSC Chain Store Sales survey. The proprietary retail activity report extended the recovery signaled in the previous month’s reading (following 13 months of consecutive contractions) by printing a 2.1 percent increase in sales for the year through October. This is the best performance for this data series since July of 2008 and a promising, leading indicator to the government’s official retail sales report due on the 16th. The rest of the session’s data would relate to Friday’s ominous non-farm payrolls (NFP) release. Continuing claims for unemployment benefits fell to their lowest levels since March through the week ending October 24th, while initial filings for the following week dropped to their lowest levels since the very beginning of the year. This is very similar to the quality and pace of what the monthly employment numbers have shown us; but so too are the third quarter productivity and labor cost figures. Productivity rose at an annual rate of 9.5 percent in the third quarter (the sharpest climb in six years) as companies tried to squeeze as much efficiency from its works as possible. At the same time, labor costs fell 5.2 percent through the period to cap the most aggressive 12-month decline in at least 60 years. This reminds us that there will still be a long way to go even after payrolls turn positive.

Nonetheless, Friday’s NFPs still hold the necessary sway to catalyze volatility and perhaps even spark a short-term trend for the dollar. The greenback is quite far from its major technical levels; so the probability of a major trend coming out of this event risk is low. However, a notable surprise in the net change or a bigger than expected uptick (or unexpected downtick) in the jobless rate can stoke a short-lived drive.

British Pound Holds up Despite an Expansion of the BoE’s Bond Purchase Program

Top event risk for the day (and perhaps the week) was the Bank of England’s rate decision. The benchmark lending rate was not the focus however. With a stubborn recession to correct, there virtually no chance that the Monetary Policy Committee (MPC) would raise rates; and a cut - though academically warranted considering economic conditions - has long been written off due to the stigma a ‘zero interest rate policy’ carries with it. However, officials still have flexibility with their abnormal stimulus efforts; and the market was indeed speculating heavily on the size and shape of the bond purchasing program after the event. Recently, there have been pundits who have caught the media’s attention for their suggestions that the BoE would pause or bring to an end their main quantitative easing program. Yet, such speculation was hard to reconcile with the extension of the United Kingdom’s deepest recession after the release of disappointing 3Q GDP numbers. Naturally, the 25 billion pound increase in the Asset Purchase Target to 200 billion points to a more desperate situation for the nation’s economy and financial markets; but reports impact was mitigated by speculation. The official consensus heading into this release was calling for an increase to 225 billion pounds. This has helped to dampen the immediate reaction to the data; but these conditions will continue to weigh in the future.

And, though the central bank activity was commanding the market’s full attention; there were notable economic indicators that should not be overlooked. The National Institute of Economic & Social Research (NIESR) GDP estimate would further dampen hopes for an economic recovery. The group reported the economy shrank 0.4 percent through the quarter ending in October and they simultaneously revised September reading from an unchanged reading to a 0.4 percent contraction as well. The group’s director, Martin Weale, opined that the current route is “probably slightly worse than the experience of the early 1980s but not as bad as that of the early 1930s.” More encouraging was the factory activity numbers for September. The 1.6 percent increase in industrial production through the month was the strongest since July of 2002. The strong performance in manufacturing (which accounts for approximately 17 percent of GDP) is a sign that some sectors will work along with government stimulus to revive the economy. However, without consumer spending and lending, a true recovery will be tepid.

Euro Shows Limited Response to ECB’s Slow, Hawkish Policy Turn

There is little doubt that the European Central Bank is among the most transparent policy authority among its peers. Today, we could see this artificially-created stability at work when a modest - but tangible - hawkish shift from the group elicited very little in the way of price action. The ECB wouldn’t deviate from expectations when it kept the benchmark lending rate unchanged at 1.00 percent; but the commentary that accompanied this decision was evidence the central bank was taking definitive steps towards removing stimulus. At the press conference that followed the official announcement, President Jean-Claude Trichet said, “not all our liquidity measures will be needed” going forward; and the emergency stimulus programs will be “phased out in a timely and gradual fashion.” Later on, when asked whether the ECB would extend its tender of unlimited 12-month loans to banks after the December 15th round, Trichet said the market is already pricing in such a shift and he would not contradict those expectations. The forthcoming offer will be the third since the extraordinary measure was implemented; and another drop in demand (the auction in June drew 442 billion euros and September pulled 75 billion) will likely confirm for policy officials whether they should cap the loans or not. In the meantime, the central bank will almost certainly maintain its wait-and-see approach while removing stimulus as low impact effort to stabilize medium-term inflation expectations.

Canadian Dollar not to be Overshadowed Friday with its Own Employment Data

With most currency traders focusing on the central bank activity today, there was little attention paid to the smaller than expected decline in the Canadian Ivey business activity survey. Yet, with a marked contraction in the employment and delivery components, there is reason for concern. Tomorrow’s employment numbers will likely attract more fundamental attention; but the mere presence of the US release can dampen the response to the Canadian report (or amplify it should the data line up correctly). Forecasts call for a third consecutive increase in payrolls; but the real quality of the data will be judged on the breakdown between full-time and part-time jobs and the direction of the unemployment rate.

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