Dollar Selling is Relentless

The US dollar remains under relentless pressure. Even though the ADP has tended to under under-estimate private sector job growth, the unexpected weakness reported yesterday is the latest catalyst for expectations of renewed asset purchases by the Federal Reserve. The euro approached the $1.40 level before the market paused in Europe. Slightly stronger than expected UK manufacturing output (0.3 vs 0.2) and the generally weak dollar environment is helping sterling edge toward $1.60, though as widely expected the BOE left policy unchanged. Comments from Vice Finance Minister Sakurai acknowledging that Japan must learn to live with a strong yen seemed to encourage yen buying and the dollar reached new multi-year lows near JPY82.25. Strong Australian jobs report sent the Australian dollar through $0.9900 as expectations for a rate hike build again.

Over the last three months, the ADP Employment report has under estimated the BLS initial estimate of private sector jobs growth by an average of about 59k. The most was the 77k under last month. However, even making this adjustment, it would point to the risk of disappointment with tomorrow’s jobs report, in which the consensus calls for about 70-75k increase in private sector employment. Although today’s weekly initial jobless claims are for well after the week that the employment survey was conducted, it will be watched closely. That said, the weekly initial jobless claims generally improved over the month of September, though remain elevated around 450k. While the market focus has been on the Fed resuming its Treasury purchases, there has been increased speculation, reflected in today’s Wall Street Journal article, that the Fed may target an interest rates and purchasing enough securities to ensure this. There is also talk that the Fed may be considering a formal inflation target or lifting their informal one. In addition, the ADP shock appears to have spurred talk about the possibility that the Fed does not wait until the Nov FOMC meeting to begin implementing its strategy.

Ironically, in the twelve months of the recovery, private sector jobs growth, as uninspiring as it has been, is better than the past two recoveries. NY Fed Dudley already estimated that $500 bln Treasury purchase would be tantamount to a 50-75 bp rate cut, which itself is fairly aggressive. An intra-meeting move would also be another sign of the Fed’s aggressiveness and determination. With this backdrop, it is hard to envisage the US dollar gaining much traction today.

The Bank of England left rates on hold as expected. The minutes will be released on October 20, the same day the government is to unveil a more detailed plan of its spending cuts. While much ink has been spilt on the diverse opinion at the Federal Reserve, the MPC appears split three ways and there is some talk that this may be reflected in the vote. The center is on hold, but seemingly with a modest dovish tilt. On the hawkish side is Sentance and given the resilience of price pressures and the risk that higher taxes keep the pressure on and some firm real sector data, he probably has not capitulated. On the other hand is Posen on the dovish side, wanting to take more action. The ECB remains on hold, but, as usual, Trichet’s press conference is the point of interest. There are two issues of note. The first is the exit strategy that the ECB is committed to, but there seems that there might be some divergence of opinions. Will Trichet weigh in either voluntarily or in the Q&A? The second, and perhaps related to the first, is sharp decline in bank usage of the ECB’s 3-month unlimited funding. Trichet will likely embrace this as demand driven rather than supply and that the ECB exit is following developments in the private sector not leading them.