Poor dollar or winds will change

The weak data from China and the USA have caused a new decline on stock markets
The market has waited for the negative regarding US dollar for so long that a weak report on labor market was worked off very actively and shocked investors, who expected rate increase in 2015. At least in October, we shouldn't expect any increase, and December is under great doubts. Such a NFP report forces central banks to restrain their monetary policy in very loyal boundaries.

Here is more detail regarding "catastrophically" low NFP - the data failed practically in all points:

  • The number of new jobs and the number of newly created jobs, moreover, taking into consideration revision of data (for August - to 136K against 173K, July - to 223K from 245K) are much below the mark of 200K set by FRS;
  • Work force (62.4% against 62.6% last month) has been the lowest value since 1977;
  • Work week dropped to 34.5 hours (34.6 - in August);
  • The level of general unemployment stayed at 5.1%, U6 unemployment rate went down to 10% from 10.3%; however, due to proxy indicators of participation in labor force and length of work week decrease, those data can't be considered as positive, either;
  • The average salary stayed unchanged - salary growth graph has remained flat without any perspectives for growth since the Lehman's collapse;
  • Let's add here slowing down in the US industrial sector and ISM decrease due to decline in industrial customers.

It is interesting that practically simultaneously with the publication of official data, a number of Federal Reserve officials spoke, making their theme the following: "the report is weak, but we have to increase the rate". The market took Bullard's statement as ramble, and it shouldn't have. It was said that the present poor NFP is occasional, the monthly growth by 200K for several years is still as real, and FRS reference points regarding labor market and inflation have almost been reached. It is possible that the current poor data is simply a provocative act, it is a study of the market's response and searches of grounds for delay of rate increase until December. Next month, the data can be easily revised towards desired results, and further, they will act according to the plan. Let's not forget that Bullard will become a voting member of FRS next year. In general, there is an impression the most of FOMC members have come to a positive conclusion regarding rate increase this year. The market will only have to comply with that.

Within Friday evening and Monday, all assets pulled back approximately with the same speed, which proves purely speculative character of the Friday movement. We should note the following from the statistics and events that occurred:

  1. Eurozone inflation fell to the negative value - analysts were active making statements regarding the need to expand Euro QE as early as in December with prolongation of effective period until the middle of 2018 and with its increase to 2.4 trn euros. Difficulties with planning oil prices do not allow to develop forecasts for periods longer than for half a year; however, expectation of QE expansion continues to put pressure and speculators will sell EUR/USD at growth;
  2. Portuguese Parliamentary elections is the lesson taught to Greece by the European Union; it is obviously beneficial to the electorate of small counties. The population of Portugal voted for the current government and strict saving policy; however, due to low attendance, the ruling party lacked votes for global margin, and now, a coalition has to be formed;
  3. The Protocol of the Bank of England's Committee for Monetary Policy noted increased value of developing markets and their significant influence on British financial stability - the British pound has become nervous;
  4. The Eurogroup meeting on October 5 discussed low rates, time of FRS rate increase, low inflation in Eurozone, 2016 Budget, and Greek plans; however, the issue of Greek state debt restructuring was not addressed at that meeting. It was said that the fall of inflation in September was mainly caused by the decrease of prices for energy resources, and Draghi traditionally ignored the German opinion regarding the issues of ECB monetary policy; and due to this fact, euro dropped more than by a figure in one day. EU Finance Ministers will continue discussions on Tuesday;
  5. The weak data from China and the USA have caused a new decline on stock markets; however, the main wave of panic is shifting towards November-December. American data published on Monday supported the general negative; we are waiting for a more detailed US trade balance on Tuesday, which will help us to assess the NFP data more adequately. And until the publication of the balance, the US dollar will experience moderate pressure.

We should pay attention to the publication of final PMI of Eurozone's services area - retail sales and industrial production for August will be calculated, and that means that the Chinese situation will have to be considered by then; however, the rumble with the German automobile sector can slightly spoil the impression. The publication of FRS meeting Protocol on October 8, in general, must be negative for dollar, but the force of pressure will depend on the data received from the USA and China during that day.

We should consider the technicalities regarding euro only: preliminary estimates are moderately pessimistic. Large hedge-funds have begun to reduce short positions in euro and yen prior to the receipt of Friday data. The growth has been completely worked off. We should expect continuation of flats in the range of 1.1275/1.1300 - 1.1150/1.1100, purchases have been accumulated above the boundary, there is a lot of pending demand on the way down; however, there are no peak volumes, it is only at 1.0800/30 that large orders have accumulated. EUR/USD will grow on the negative from the USA and on the decline of stock markets, it will fall on ECB's rhetoric. Usually, the publication of ECB protocols has little influence on markets; however, the last meeting led to an active downfall caused by Draghi's comments; and against this background, we can expect renewal of minimums in euro by speculators.

Author: Navsher Bartash,
ForexChief Currency strategist