FX Narrows Ahead of Payrolls by Korman Tam

The major currency pairs will likely remain confined to a narrow range heading into tomorrow’s US jobs report. The data will have lasting implications on both the dollar and Fed policy. Consensus forecasts are calling for non-farm payrolls to improve to 94k in September, reversing sharply from the 4k decline in August. A significantly higher than expected reading, along the lines of 125k+, will likely dampen the prospects for more Fed rate cuts this year and stem further aggressive selling in the greenback. Meanwhile, a reading in NFP of beneath 50k would open the floodgates to dollar declines and heighten expectations for another 50-basis point cut at the end of the month. The unemployment rate for September is forecasted to creep up to 4.7% from 4.6% in August.

The ECB and BoE left policy unchanged today, with subsequent comments from ECB President Trichet triggering a whipsaw reaction in the euro. The dollar was initially stronger against the majors but quickly pared its gains on weak US economic data.

Weekly jobless claims edged up higher than forecasts at 317k. August factory orders and durable goods orders both declined by 3.3% and 4.9%, respectively.
Euro Rebounds

The ECB, as largely anticipated, held monetary policy unchanged when it announced its decision this morning, standing pat at 4%. The decision garnered a muted reaction from the currency market, but the subsequent press conference prompted a short-lived sell-off in the euro – hitting a session low at 1.4069 against the dollar.

ECB President Trichet walked a tightrope in his press conference as he carefully maintained a balance in assessing the risks to the Eurozone economy. Traders initially focused on Trichet’s economic outlook, saying that risks of growth are on the downside. He tempered fears though, by suggesting the fundamentals of the economy support a favorable medium term outlook – but that market volatility translates into more uncertainty. Trichet offset his dovish assessment on the economy, by maintaining that risks to inflation were still tilted toward the upside, adding that the Bank was prepared to act if necessary and to counter upside risks to price stability. He reiterated his stance on exchange rates, adding that the euro rate would be one factor in determining rate decisions.