Bullish US Non-farm payrolls pushes USD up against all other pairs

Week Commencing Monday 6th October 2014


This Week in Brief


Apologies for the lack of report last week, this was due to technical issues with our newsletter software. These issues have now been resolved.


We have a quiet week ahead for the UK with the BoE MPC meeting the only event of note. We expect no change in rates or QE, so expect emphasis to shift away from this event to the minutes and report later on in the month.


In the US we have the FOMC minutes, which again is the only release of note. We expect Janet Yellen to clarify her previous dovish comments and potentially clarify when interest rates are likely to rise. It will also be interesting to hear what other members of the committee have to say, in particular Charles Plosser on Friday.


In Europe we expect a further disappointing German factory orders release to drive the EUR weaker. Mario Draghi is also scheduled to speak in the US, where he should be questioned further on the asset purchase program and the potential of full blown QE in the future.


Overriding Market Themes


Starting in the US, a robust burst of job creation increased payrolls by nearly a quarter million workers last month, and the unemployment rate fell below 6 percent for the first time since mid-2008. The nation produced an estimated 248,000 net new nonfarm jobs in September, easily exceeding the threshold of 200,000 that analysts consider safe for maintaining economic momentum. Job gains were led by an estimated 236,000 private-sector jobs, with the remainder in government agencies or public schools. The unemployment rate fell to 5.9%, which was the first time it fell below 6% since July 2008, shortly before the financial crash tipped the world into recession. The unemployment rate steadily has declined since its peak at 10% in late 2009. It is not all rosy however, as the government's broadest measure of unemployment and underemployment (which includes those who require full-time pay but can only find part-time work as well as those who are voluntarily unemployed) was 11.8% in September. That figure is well below the 2010 peak of 17.2% but remains above levels between 8% and 9% prior to the last recession. All in all however, this was a strong week for the US economic recovery, and with unemployment falling so rapidly, many analysts are expecting some increased near term pressure to increase interest rates. Who ever said that the UK was going to be the first to raise them!


Over in Europe, ECB president Mario Draghi has announced further details of the bank’s asset purchase programme; set to begin almost immediately this year. Keeping its benchmark interest rate unchanged at 0.05 percent, the meeting on October 2 was dominated by questions regarding the new program. Set to begin in the fourth quarter of this year and extend over a two-year period, the ECB hopes that the purchases will add a much-needed measure of liquidity to its weakening financial system and arrest fears of looming deflation in the euro area. Draghi failed to mention exactly how much the bank will spend on assets, though stressed that the ECB was committed to reviving the region’s stagnant economy and, in particular, boosting below normal inflation. The ECB’s new stimulus package is scheduled to begin as the US Fed’s bond-buying programme draws to a close, thereby highlighting the differences between the US and European recovery. This, in addition with joining Japan and China in a currency swap arrangement for export competitiveness, Europe’s monetary measures promise to strengthen the dollar further.


Moving back home, the UK economy grew more than initially expected in the three months to September, fuelling optimism over the health of the economy, official data showed on Thursday. In a report, the ONS said GDP expanded at a seasonally adjusted rate of 0.9% during the second quarter, well above expectations for a 0.8% reading and up from a previous estimate of 0.7%. This meant that annualised GDP grew at a rate of 3.2% in the second quarter, in line with expectations and unchanged from a previous forecast. Revisions also showed the recession that started in 2008 was shallower than initially estimated and the bounce-back stronger, with output recovering its pre-recession peak in the third quarter of last year. GDP is now 2.7 percent higher than it was at the start of 2008. The changes to the data may strengthen the case for Bank of England MPC committee members that it’s time to begin raising interest rates from a record low. While the BOE kept the benchmark rate at 0.5 percent this month, two officials are pushing for an increase. In nominal terms, the economy is now 28 billion pounds ($45 billion), or 6.6 percent, bigger than previously estimated.


GBP This Week


We have an extremely quiet week ahead for the UK, with the Bank of England’s monetary policy decision on Thursday the only release of note. We very much doubt that the bank will move away from its current 0.5 percent interest rate and asset purchase framework, therefore this could be somewhat of a non-event. With this in mind, we will be looking for any change of tone from the accompanying statement until later on in the month, were we find out the voting pattern and meeting minutes.


USD This Week


Much like the UK, we also have a quiet week ahead for the US Dollar with the FOMC minutes the only major release of any note. Last month saw Fed chair Janet Yellen push back interest rate expectations with an overly dovish speech, mentioning a “considerable time” must pass before the FOMC will consider rate rises. Given that we have seen monstrous jobs growth, coupled with some very solid growth figures (putting the US just second versus the UK in the global growth contest), we expect that this view will be reasonably short lived. We will be watching Yellens speech, coupled with some of the more important Fed committee members (in particular Charles Plosser, President of the Federal Reserve Bank of Philadelphia on Friday).


EUR This Week


In Europe we will be watching German factory orders, which is the first release of the week being scheduled for Monday morning. Expectations continue to point towards yet another downside shift in this indicator for Europe’s largest economy.  That said, recent trade data has indicated that Eurozone demand is holding up in the face of escalating tensions in Ukraine and Russian economic sanctions, therefore we may well start seeing some consolidation rather than further “epic” declines.


Moving to Thursday we will be listen to Mario Draghi speak at the Brookings Institute in Washington DC. With the recent announcement of the implementation of an asset purchase program from the ECB, this should be a very important speech for him (given the global audience of the event). Much has been made of the possibility of a fully-fledged quantitative easing program at some stage in the future, and markets will therefore be listening for any hint on future direction. 

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