We look at the US September Nonfarm payroll report released on Friday as well as at the outcome of the G20 meeting in Washington and come to a conclusion that the risks in EUR/USD till the end of October are shifted upwards and in USD/JPY towards a further decline.
Speaking of the employment report last Friday it can most likely be interpreted as a signal towards a subsequent easing of the monetary policy in the US at the Fed’s meeting on November 2-3 rather than a signal towards recession resumption in the US. Yes, Nonfarm payrolls did come out worse than was expected (actual 94k) but it is easily compensated by the fact that there were 64k working places created in the private sector almost matching the estimates of the analysts and, secondly, the level of unemployment remained at the same level of 9.6% instead of rising to 9.7% as many predicted. All in all, the situation with risk appetite is still stable which is confirmed by the rise on the US stock market on Friday (Dow Jones +0.53%, S&P500 +0.61%, Nasdaq +0.77%) given the release of weak data. This is, of course, negative for the US dollar.
As for other indirect arguments in favor of a subsequent decline of the American currency we can take a closer look at the gain in Treasury prices on Friday as well as the US current economy outlook by Goldman Sachs and PIMCO. One of the main economists in GS in the US speaks about Fed expanding the QE program by $500 bln on November 2-3, and up to $1000 bln in total within the second round of quantitative easing. Bill Gross in his turn insists that the Fed will buy bonds for $100 bln each month, thus, spending $1.2 bln in total.
We consider all this as a signal that the EUR/USD rate may test the level of 1.4150 till the end of October; there are risks to test the level of 1.45 till the end of the year. In addition, by the Fed’s November meeting the currency market may come to the point of pricing in all the risks associated with easing monetary policy. In this case, we can get some profit-taking when the Fed announces its decision. This, in turn, will support the US dollar in the short-run.
Speaking of the IMF-World Bank meeting in Washington, then it is clear that the US and a number of other countries are not willing to let any manipulations on the currency market. All this as well as the upcoming G20 Ministerial meeting on October 21-23 coupled with the G20 Deputies meeting at the beginning of November may be regarded as a deterrent for the Bank of Japan to conduct interventions. In this regard, we again write about the fact that the risks in USD/JPY are shifted down to 80. Any rise in the given pair against verbal or even real interventions by 200-300 points we will in the end advice using for opening new short positions with a target of 80.
This weak we emphasize the US retail sales data (15.10.2010) and inflation (14.10.2010 PPI, 15.10.2010 CPI). Retail sales are expected to show a further decline in the US business activity, and the inflation data should signal lower price growth rate. Both factors is a signal for the Fed to announce new economy stimulus measures in November, which is, of course, negative for the US dollar.
Konstantin Bochkarev, currency strategist
of company Admiral Markets.
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