US Dollar Rallies on Expectations that Payrolls Will be Strong

For the second day in a row, we have seen the greenback recover, but that strength was not universal. The dollar is higher against the Euro, British Pound, Swiss Franc and Japanese Yen but weaker against the Australian, New Zealand and Canadian dollars. Even though commodity prices are softer, commodity currencies are maintaining their strength thanks to solid economic data.

We have also seen upside surprises in US data, which explains why the dollar is stronger. Not only was the drop in the service sector ISM less than expected but the components of the report painted a more bullish outlook for this Friday?s non-farm payrolls. After contracting for the first time since September 2003, the employment component rebounded back into expansionary territory, which suggests that service companies hired more people than they fired last month. This theory was confirmed by the rebound in the ADP employment report which tracks private sector employment as well as the Challenger layoffs report. Economists are currently expecting 100k jobs to have been added to corporate payrolls during the month of September and the latest data support that call.

Across the Atlantic, the market is also looking for the European Central Bank and Bank of England to lean towards less hawkish monetary policies which is a part of the reason why the dollar is stronger against the Euro and British pound. Both central banks are expected to leave interest rates unchanged but this does not mean that their decisions will not be market moving. ECB President Trichet will be delivering his usual post meeting press conference. There has been a lot of speculation that the ECB could physically intervene in the Euro but this is an extreme scenario that we do not expect to happen. A good middle ground however would be some concerned comments from ECB President Trichet and tomorrow?s press conference would be an opportune platform. Should he fail to deliver, the Euro will bounce. If he does, then we could see 1.40. As for the BoE meeting, watch out for a surprise interest rate cut or another statement downplaying the central bank?s degree of hawkishness.

In addition to the ECB and BoE monetary policy meetings, the US will also be releasing jobless claims and factory orders. If claims remain below 300k, speculation of a bottom in the US economy will build. As for factory orders, it is expected to drop following deterioration in durable goods and manufacturing ISM.

The Dow Jones Industrial Average is down 85 points at the time of publication. Home Depot and General Motors are higher but tech stocks are leading the losses. Banc of America upgraded GM from sell to neutral. Stocks are trading lower ahead of Friday?s job report which will be crucial in determining whether the Federal Reserve will continue to cut interest rates. Meanwhile Treasury yields are slightly firmer.