October may have been a great month for the U.S. dollar but as we begin the final 2 months of the year, the greenback is losing its mojo. The dollar traded lower against all of the major currencies on the first day of November and we can point to a few reasons for the decline.
First and foremost, the greenback started the NY session under pressure with the sell-off gaining momentum on the back of softer US data. According to Challenger Grey & Christmas, layoffs surged in October, although more than half of the 153.6% increase was due to Verizon’s voluntary severance program. Manufacturing growth slowed with the ISM index dropping to 57.7 from 59.8, a consequence of the trade war. The dollar is also down because high risk currencies are up and part of this move is driven by the decline in Treasury yields and corresponding rise in Eurozone, UK and Australian rates. Another reason for the move is the third day of recovery in equities, which encourages gains in high beta currencies. Some investors got excited about President Trump’s comments on China – he said in tweet that he had a long and very good conversation with President Xi and plan to sit down with the Asian leader at the G20. Xi is also willing to meet with Trump but investors shouldn’t let their hopes get carried away because shortly after Trump’s tweet, Chief Economic Advisor Kudlow said if no deal is reached, the President will act aggressively. Nonetheless, to recap, here are the –
5 Reasons Why the Dollar Declined Today
- Weaker US Data
- US yields fall, causing yield spread to move against the dollar
- Stocks rally for the third day in a row, boosting risk appetite
- US-China trade deal hopes
- Profit taking ahead of Non-Farm Payrolls
Non-farm payrolls are scheduled for release tomorrow and despite today’s decline in the dollar, the market is looking for strong jobs growth. Last month, we learned that due to hurricane disruptions, only 134k jobs were created in September. A snapback is expected in October with economists looking for non-farm payrolls to rise by 200K. Although we also expect jobs to rebound, the risk is to the downside because of the increase in the 4 week average of jobless claims and the voluntary severance offer by Verizon. We don’t anticipate improvements in the unemployment rate or average hourly earnings. So if either one of these reports miss, we could see today’s pullback in the dollar turn into a deeper correction. In the long run, we don’t think the dollar has peaked but a correction is long overdue.
Here’s a look at how the leading indicators for NFPs stack up this month. Bear in mind, the ISM non-manufacturing report won’t be released until after the report.
Arguments for Stronger Payrolls
- Consumer Confidence Index Hits 18 Year High
- ADPWealth Strength IndexADP is Flat and trending Up Rises to 227K from 218K
- Continuing claims Fall to 1.63M from 1.65M
Arguments for Weaker Payrolls
- University of Michigan Reports Drop in Sentiment
- Challenger Reports 153.6% Increase in Layoffs,
- Employment Component of ISM Manufacturing Index Declines
- 4 Week Average Jobless Claims Increases to 213K from 209K
Meanwhile, the big focus today was the Bank of England meeting which combined with Brexit optimism sent sterling above 1.30. Today’s 1.85% rally was the strongest one day gain for the pair this year. The BoE voted 9-0 to leave interest rates unchanged and lowered its growth forecasts for the year but instead of falling, sterling soared as the central bank talked rate hikes. According to the summary of the report, the MPC felt that “Were the economy to continue to develop broadly in line with the November Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate.” Governor Carney said a Brexit deal could release pent up investment demand but a no-deal Brexit could also lead to a major supply shock that could drive up inflation and interest rates. While many are skeptical, the fact that he is thinking about rate hikes in a deal and no-deal scenario underscores the BoE’s hawkishness. As a result, bears covered their shorts allowing sterling to enjoy its strongest day since April 2017. Although 1.30 is a natural area of resistance, given the trending nature of GBP, we expect the rally to extend beyond 1.3050 quickly.
It was also a good day for other currencies such as EUR/USD, which rose 0.9%, AUD/USD which jumped 1.8% and NZD/USD which increased 2%. The Canadian dollar traded higher but its 0.5% gains were modest in comparison. A stronger than expected Australian trade report helped AUD while NZD was supported by an uptick in job ads and house prices. At the end of the day however, the only reason why these currencies experienced such strong gains is because of short covering – a force that could continue if tomorrow’s US jobs report miss.