Jobs Featured

The US jobs report is obviously the main event today. It is one of the most difficult high frequency data to forecast. While cognizant of the uncertainty and slack in the economy, I think the risk of an upside surprise is greater than it may appear. I say this primarily because the recent string of US economic data has surprised on the upside. Economists have been slow to recognize that the economy appears to be expanding at around 2.5% in Q3 not contracting.

Ironically, the stronger the report, the more the dollar's downside beckons. Risk appetites would be strengthened. This will allow the correction that began yesterday to continue with a target close to $1.36-$1.37. A weak report would be less surprising and likely a less dramatic market reaction. An other outright decline in aggregate hours worked would also fan anxieties. Many of the major foreign currencies, including the euro continue to track the S&P 500 closely.

The custody holdings at the Federal Reserve for foreign central banks continued to fall in the week through Wed, bring the decline above to about $62 bln since late August. The decline in custody holdings reflects central bank intervention to support their currencies amid the exodus of hot money flows. Who actually uses the Fed's custody services is not known, but there have been a number of central banks that have been intervening, some in the open and some more discreetly. Several East Asian central banks are believed to have been intervening, though confirmation is lacking. Turkey has been more explicit. The central bank has sold $1.3 bln this week alone and offered an additional $750 mln in a daily auction today.

The central bank interventions are likely to depress reserve figures. However, valuation will also play a significant role. Japan reported its reserve figures earlier today. They declined to $1.2 trillion, a decline of almost $18 bln. Of that decline $13 bln is accounted for by foreign currency reserves (separately BOJ drew down its deposits held by both domestic and foreign banks, including central banks). Assuming that there was no intervention in September, after that record one day intervention in August, the change in fx reserves is a function of the shift in valuation owing to the euro's 6.6% decline against the dollar. The large euro decline against the dollar in September (and to a much less extent sterling 4.6% decline) will impact those central banks that have diversified their reserves the most.

It also appears capping the Swiss franc has not been very expensive for the Swiss National Bank. However, talk spurred by the foreign trade minister about a 1.30-1.40 rather than 1.20, is likely to prove wide of the mark. It seems more reasonable to let the market to continue to do the heavy lifting. Euro-Swiss is currently flirting with the 200 day moving average for the first time since the first half of April. The have achieved very impressive results in terms of "bang for the buck".

I would also point out gold declined by nearly 11% in the month of September and this too will weigh on reserves. Of the $18 bln decline in Japanese reserves, the valuation of gold (assuming it did not sell any) accounted for nearly a third.