Currency Traders Sell Dollars Ahead of Non Farm Payrolls Report - Can the Dollar Rebo

The US dollar rallied strongly through the London currency trading session, but a sudden shift in sentiment actually left the trade-weighted Dollar Index in negative territory through the New York afternoon. Forex traders seemed all-too-willing to close fresh dollar positions ahead of tomorrow’s critical Non Farm Payrolls data, with the greenback virtually guaranteed to see substantial volatility following the release. Early morning US Initial Jobless Claims results likewise dimmed outlook for the key payrolls result, as new unemployment insurance requests hit their highest four-week average since October, 2005. A subsequent mortgage report showed that national Mortgage Delinquencies hit their highest quarterly rise in over 20 years—deepening fears of further lending market duress.

The dour mortgage figures coincided with official announcements that the government would seek to ease pressures on subprime borrowers, with US President George W. Bush unveiling plans to freeze mortgage payments for a select group of homeowners. The president outlined a plan in which the government would work with lenders to keep adjustable rate mortgages from resetting to higher servicing costs for a period of five years—eliciting mixed reactions from businesses and consumers alike. Yet domestic equity markets seemingly took the news very well, as the Dow Jones Industrial Average rallied an impressive 140 points to 13,583 just an hour ahead of the close. The news had little effect on the US dollar, however, and market attention now turns to tomorrow’s critical Non Farm Payrolls report.
Currency traders anxiously await the release of Bureau of Labor Statistics payrolls data, with domestic growth forecasts and interest rate outlook hanging in the balance. Economists predict that the labor market added a net 80,000 jobs through the month of November—less than half the rate seen in October—with the Unemployment rate rising to 14-month highs of 4.8 percent. The jobs result will easily weigh on domestic interest rate expectations and subsequently the US dollar. A shift in Federal Funds Futures markets now shows that traders have pulled back rate cut expectations through the day’s trading. Speculators now price in an approximate 38 percent probability that the Federal Open Market Committee will cut rates by 50 basis points at their December 11 meeting—down from the 44 percent seen through yesterday’s close. Yet subsequent outlook will greatly depend on tomorrow’s Non Farm Payrolls result. If NFP’s surprise significantly to the topside, we may easily see the US dollar rally strongly on improved interest rate forecasts.
[I]Written by David Rodríguez, Currency Analyst for DailyFX.com[/I]