Dollar Recovery Continues Ahead of Leading Indicators for Non-Farm Payrolls

• Dollar Recovery Continues Ahead of Leading Indicators for Non-Farm Payrolls
• Australian Dollar Ends 10 Day Winning Streak Ahead of RBA Rate Decision
• The Question for Carry Traders is Can the Dow Rise Further

[B]Dollar Recovery Continues Ahead of Leading Indicators for Non-Farm Payrolls[/B]

After falling to a record low last week, the US dollar continues to recover. Although some people have credited the rebound to the upcoming G7 meeting, the meeting is over 2 weeks away which means that other factors are definitely at play. With Thursday’s ECB and BoE monetary policy meetings as well as Friday’s non-farm payrolls report still due for release, there is a lot to worry about over the next few trading days as these events will also shed more light on how policymakers feel about the US dollar. Should the ECB or BoE express any concern about the weakness of the greenback or the strength of their own currencies, only then is there a big risk of tough criticism towards the US dollar. In the past, specific currency comments at G7 meetings have led to sharp market volatility. This is something to consider but not something to worry about until after we receive the non-farm payrolls report. In the meantime, tomorrow we have a lot of US economic data due for release, many of which are leading indicators for Friday’s payrolls number. We will be keeping a particularly close eye on the Challenger Layoffs report, the ADP employment report and the employment component of service sector ISM. Given the market’s extremely optimistic 98k forecast, it won’t take much to disappoint. However along the same lines, there are a lot of people still skeptical on whether payrolls can actually be that strong. Therefore any major drop in layoffs or increase in private sector employment could help extend the dollar’s rise. In the meantime, the weakness of the labor market continues to be a big drag on the outlook for the US economy. Last month, pending home sales dropped 6.5 percent. Not only was this far worse than market expectations, but it followed a 12.2 percent drop the prior month. This drop is particularly worrisome because pending home sales is a leading indicator of how existing and new homes sales will fare in the months forward. Even though the stock market is reflecting optimism, it is important to remember that the troubles in the US housing market are not behind us.
Australian Dollar Ends 10 Day Winning Streak Ahead of RBA Rate Decision[/B]

The Australian dollar ended its 10 day winning streak following soft manufacturing PMI data and a sharp reversal in gold prices. The slowdown in manufacturing activity was not surprising given the strong currency and softer employment. Tonight the Australian dollar will continue to be in play with the Reserve Bank of Australia interest rate decision, retail sales and the trade balance due for release. The RBA is not expected to alter interest rates and that disappointment could weigh on the Australian dollar. When the RBA leaves rates unchanged, they do not release a statement. Even though commodity prices have been soaring, the strength of the Australian dollar is also expected to trigger a sharp increase in the trade deficit. As for retail sales, that is expected to slow modestly. There are no Canadian or New Zealand data due for release which means the fluctuations of these currency pairs will be driven by the market’s overall demand for high yielding currencies as well as the movements of commodity prices. There is one other thing to mention, which is the $8.5 billion acquisition of US based Commerce Bancorp by bank Toronto Dominion, Canada’s third largest. The Canadians are spending their new found wealth – six months ago, that deal would have cost TD 1.3B more Canadian dollars.
The Question for Carry Traders is Can the Dow Rise Further[/B]

Profit taking in the Dow has triggered profit taking in the Japanese Yen crosses or carry trades. Since the Federal Reserve cut interest rates on September 18 2007, the stock market has increased just shy of 800 points from a low of 13360 to a high of 14155 yesterday. On a point basis, this move has been significant especially since it has taken the Dow to all time high above 14,000. On a percentage basis, it is only slightly more than 5 percent. With carry trades moving in lockstep with the US stock market, the burning question on everyone’s mind is How Much Further Can it Rise? After the Fed rate cut interest rates last month, we talked about how the S&P 500 sees gains on average of 12 percent. From September 18, which was the first time that the Fed cut rates this cycle a 12 percent move puts the S&P 500 at 1650 and the Dow at 14950. Based upon history alone, the Dow may have far more room to rise.
Euro: Traders Nervous About Verbal Intervention[/B]

The Euro fell by the largest amount in over a month on speculation that the European Central Bank will be forced to verbally intervene in the currency this Thursday. An article in the Financial Times talked about the recent the discontent amongst European politicians and exporters on the impact of the strong currency on foreign demand. ECB officials have been relatively quiet about the Euro’s strength which suggests that they are still trying to figure out themselves whether or not to address the currency’s recent movements. They are leaving it to Trichet who has the big task of figuring out if the risk to growth is greater than current inflationary pressures.
Weaker Economic Data Continues to Drive the British Pound Lower[/B]

Weaker economic data continues to weigh on the British pound. Construction sector PMI dropped from 64.8 to 60.3 last month. On the heels of the Northern Rock debacle, Nationwide consumer confidence is not expected to be firm. Tomorrow we have service sector PMI. This is expected to follow manufacturing and construction PMI lower. The focus for the UK will be on Thursday’s monetary policy meeting. There is a slim possibility of an interest rate cut and even if the BoE forgoes lowering rates, the markets will be watching for whether a monetary policy statement is released.