Preparing For This Week’s NFP Report - October
2007
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The stage has certainly been set
for the September Non-Farm
Employment Change report, scheduled
for release on Friday, October 5th at 08:30 EST. The report for
August showed a surprise contraction in the Non-Farm labour figure
of 4k, the first contraction in four years. Prior to this data
the US Fed had stated that it was looking for cues from financial
data to aid their interest rate decision after the sub-prime mortgage
fall out and subsequent market turmoil. The Fed took this contraction
into consideration and lowered interest rate by 0.50% to 4.75%.
Since then the Greenback has resumed what looks like a long-term
fall in value against most of the World’s major currencies.
This Month’s
Report is Eagerly Awaited
Market sentiment remains Dollar bearish with the majority of economists
expecting further interest rate cuts from the Fed before the
end of the year. If this is to be the case Payrolls data will
play a large part in the decision making process once again.
Therefore, it goes without saying that the headline figure will
be watched with great anticipation. Currently economists expect
a rebound to +100k jobs created in September. However, this figure
may be revised over the coming week after the ADP
Non-Farm Employment report and ISM data.
What may come as a surprise to traders is that any revisions
to last month’s report will be very closely watched, even
more so than usual. This fact makes a trade based on the headline
figure much more treacherous than usual. There is a very strong
chance of conflict between the headline figure and revisions
so traders must be extremely vigilant of deviations. It should
also be noted that the accompanying unemployment
rate (in at
4.7% last month) will weigh in with some influence.
The Path of Least Resistance
There is no doubt that the path of least resistance is currently
against the US Dollar. Therefore we should expect any positive
Payrolls data to have less of an impact than if the Non-Farm
Labour market were to surprise to the down-side yet again. What
I mean by this is an upward revision combined with strong employment
growth for the month of September may very well spark a Dollar
rally but this may be seen as an opportunity for Dollar bears to sell on a pullback. Let us not forget that during a bear market
positive news is largely ignored in favour of the negative. Strong
Non-Farm employment data will likely lead economists to believe
that interest rate cuts may not be as abrupt or readily forthcoming
as feared. However, it is unlikely that this data alone will
be enough for economists to expect the Fed to remain on hold
or even raise rates over the medium term.
True to the path of least resistance, any further contraction in
the data will likely spark further aggressive Dollar selling. Market
sentiment expects rate cuts and if the labour market really falls
away economists may predict a further 0.25 - 0.50% decrease this
side of the New Year.
Top Performers
Technically and fundamentally the best performers against the US
Dollar have been the Euro and the Australian and Canadian
Dollar.
The Euro has been supported by the expectation that further ECB
rate tightening is possible and a cut is definitely out of the
question in the near term. The Australian and Canadian Dollars
have been boosted by the price of commodities, which are of course
denominated in US Dollars. Australia is a major exporter of Gold and therefore its currency is somewhat positively correlated
with the price of the precious metal. Interest
rate expectations
in Australia are also steady and with a 6.5% rate compared to
the 4.75% of the US there is also carry-trade potential. The
result has been fresh 18-year highs in the AUDUSD
exchange rate of 0.8886. Likewise the Canadian Dollar, whose value is positively
correlated with that of oil, actually breached parity with the
US Dollar over the previous week. This means that 1 US Dollar
was actually worth less than 1 Canadian Dollar as the USDCAD
exchange rate hit a low of 0.9935.
Meanwhile the British Pound staged a mild comeback over the last
week, as fears over the UK’s own housing and mortgage markets
gave way to the pressure of Dollar weakness. Although economists
believe the Bank
of England is done with interest rate hikes, no
cuts are expected yet.
