Forex Investment and Currency Trading

FX Update
Change in Nonfarm Payrolls (Survey: -105k, Actual: -159k)
Unemployment Rate (Survey: 6.1%, Actual: 6.1%)
Average Hourly Earnings MoM (Survey: 0.3%, Actual: 0.2%)
Average Hourly Earnings YoY (Survey: 3.6%, Actual: 3.4%)
ISM Non-Manufacturing Composite (Survey: 50.0)

USD
USD eased back against the G10 ahead of payrolls, which came in weaker than expected. Attention shifts to the House TARP/ESSA vote today following Senate approval; news reports suggest that House Republican group seeks to slash financial bailout bill to $250 billion from $700 billion; McCain noted that he was “guardedly optimistic” the bailout bill will pass House of Representatives. The global recession is taking shape with dizzying speed.  In FX the key implication is further downside for commodity FX and EM currencies.  Among the big 3, ongoing financial strains poise some upside for JPY, but we will have to wait for signs of life somewhere to drive the next sustained FX move. Aggressive policy moves suggest that the US will be the first out of the rabbit hole, hence the call for USD gains in 2009 – but probably somewhat backloaded.

EUR/USD

Final Sep services PMI a touch higher than the flash estimate at 48.4. This and yesterday’s weak manufacturing print puts the composite PMI at 46.9, down from 48.2 in August. Now ECB is expected to ease in November. Trichet – we have regained control of inflation expectations; inflation risks diminished; option of a cut was discussed, but decision was unanimous (to keep rates unchanged) Retail sales volume up 0.3% m/m vs 0.1% expected and July revised up to 0.1% from -0.4%.   But the underlying trend remains weak, with Jul-Aug 0.3%  annualized below the 2Q tally (2Q was down 3.2%).  These numbers sidelined by the more forward-looking sentiment readings.

GBP/USD

Sep services PMI business activity reading fell just over three points to 46.0 — the lowest print since the start of the series in July 1996 — from 49.2 in Aug.  New business at 45.2, signaling a further decline in the output index.  The deterioration was is large enough to trigger calls for a 50 bps rate cut around the Street.

USD/JPY

The yen strengthened against the dollar after US payrolls numbers were weaker than expected. Japan’s economics minister Yosano suggested that a BoJ rate cut as not likely to be effective in supporting Japan’s economy.  

AUD/USD and NZD/USD

The Australian dollar is having its worst week in 23 years as high yielding assets continue to be sold. NZD has slumped too as equity markets decline globally and expectations for rate cuts internationally increase. With fragile equity market confidence and the VIX volatility index climbing above 45% (its highest levels since 19998), expect continued weakness out of AUD and NZD. The RBA meets on October 7th, and is expected to cut rates 50bp.   

USD/CAD

The Canadian dollar is likely to have its biggest 1-week decline since 1971. CAD has been particularly hurt by commodity prices which continue to sell-off. Crude oil is likely to drop the largest 1-week amount in nearly 4-years. CAD is 4% weaker against the dollar since September 26th.

Latin America

The Real continues to decline for a third straight day as capital flows into Latin America decrease. Risk aversion continues to be the major driving factor for Latin American currencies. Brazilian Industrial Production numbers were weaker than expected over the past month The Mexican peso has declined as well with weak data supporting the selling. Producer confidence in the area fell across the board in September. The pressure on these markets should continue as long as the US remains in this liquidity crunch.

Commodities Update

Oil is likely to have its biggest weekly drop in over four years with additional pressure likely to continue on the back of weak US payrolls data. The liquidation of contracts on the back of risk aversion is accelerating the move. Gold continues to drop as well as the dollar rallies.