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The stage has certainly been set for the September Non-Farm Employment Change report, scheduled for release on Friday, October 5th at 08:30 EST. The report for August showed a surprise contraction in the Non-Farm labour figure of 4k, the first contraction in four years. Prior to this data the US Fed had stated that it was looking for cues from financial data to aid their interest rate decision after the sub-prime mortgage fall out and subsequent market turmoil. The Fed took this contraction into consideration and lowered interest rate by 0.50% to 4.75%. Since then the Greenback has resumed what looks like a long-term fall in value against most of the World’s major currencies.
This Month’s Report is Eagerly Awaited
Market sentiment remains Dollar bearish with the majority of economists expecting further interest rate cuts from the Fed before the end of the year. If this is to be the case Payrolls data will play a large part in the decision making process once again. Therefore, it goes without saying that the headline figure will be watched with great anticipation. Currently economists expect a rebound to +100k jobs created in September. However, this figure may be revised over the coming week after the ADP Non-Farm Employment report and ISM data.
What may come as a surprise to traders is that any revisions to last month’s report will be very closely watched, even more so than usual. This fact makes a trade based on the headline figure much more treacherous than usual. There is a very strong chance of conflict between the headline figure and revisions so traders must be extremely vigilant of deviations. It should also be noted that the accompanying unemployment rate (in at 4.7% last month) will weigh in with some influence.
The Path of Least Resistance
There is no doubt that the path of least resistance is currently against the US Dollar. Therefore we should expect any positive Payrolls data to have less of an impact than if the Non-Farm Labour market were to surprise to the down-side yet again. What I mean by this is an upward revision combined with strong employment growth for the month of September may very well spark a Dollar rally but this may be seen as an opportunity for Dollar bears to sell on a pullback. Let us not forget that during a bear market positive news is largely ignored in favour of the negative. Strong Non-Farm employment data will likely lead economists to believe that interest rate cuts may not be as abrupt or readily forthcoming as feared. However, it is unlikely that this data alone will be enough for economists to expect the Fed to remain on hold or even raise rates over the medium term.
True to the path of least resistance, any further contraction in the data will likely spark further aggressive Dollar selling. Market sentiment expects rate cuts and if the labour market really falls away economists may predict a further 0.25 - 0.50% decrease this side of the New Year.
Technically and fundamentally the best performers against the US Dollar have been the Euro and the Australian and Canadian Dollar. The Euro has been supported by the expectation that further ECB rate tightening is possible and a cut is definitely out of the question in the near term. The Australian and Canadian Dollars have been boosted by the price of commodities, which are of course denominated in US Dollars. Australia is a major exporter of Gold and therefore its currency is somewhat positively correlated with the price of the precious metal. Interest rate expectations in Australia are also steady and with a 6.5% rate compared to the 4.75% of the US there is also carry-trade potential. The result has been fresh 18-year highs in the AUDUSD exchange rate of 0.8886. Likewise the Canadian Dollar, whose value is positively correlated with that of oil, actually breached parity with the US Dollar over the previous week. This means that 1 US Dollar was actually worth less than 1 Canadian Dollar as the USDCAD exchange rate hit a low of 0.9935. Meanwhile the British Pound staged a mild comeback over the last week, as fears over the UK’s own housing and mortgage markets gave way to the pressure of Dollar weakness. Although economists believe the Bank of England is done with interest rate hikes, no cuts are expected yet.
At this point I would like to make it clear that I AM NOT a licensed financial advisor and that the views and opinions expressed in this article are strictly my own and do not represent a recommendation to trade, or not trade (or make any financial decision). This article should be used for educational and fun purposes only and the topics covered above should be fully researched by yourself.
David Thorpe is a senior contributor for http://www.passion-trading.munbuns.com a free educational resource centre for traders and investors. The site has a dedicated forex trading and currency trading portal and its goal is to stimulate the minds of its users, enabling them to achieve a greater understanding the forex market, thus helping them to become more profitable.
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