The best performing currency today was the British pound, which gained more than 1% versus the euro, U.S. dollar and many other major currencies. Before the North American open, the British High Court ruled that the government’s plan for Brexit needs Parliamentary approval. Investors cheered their decision by taking sterling sharply higher as they know it will now take longer for the government to invoke Article 50. More importantly, this means the eventual terms of exit should be milder as most members of Parliament did not support the decision to leave the European Union which means we are looking at a soft and not hard Brexit. Acting fast, Prime Minister May has already appealed the ruling and the Supreme Court will hear the case on December 7th. We doubt that they will overrule the High Court’s decision because getting the entire government involved in this process is extremely important due to the potential magnitude of the consequences for the U.K. economy and how the country operates as a whole. Considering that a large part of sterling’s weakness was driven by Brexit fears, a strong short squeeze is more than justified. This is especially true given the less hawkish comments from Bank of England Governor Carney. The central bank is no longer looking to lower interest rates this year and in Carney’s words the “BoE has neutral bias on policy going forward.” This is largely due to the improvements in the economy and rising price pressures. While 1.25 is significant barrier of resistance, given the positive fundamental factors we believe this level will be challenged again in the very near future.
The rally in sterling was also fueled by broad based U.S. dollar weakness. The October non-farm payrolls report is scheduled for release tomorrow and there’s little reason to believe that job growth was strong. Taking a look at the leading indicators for non-farm payrolls the service sector reported slower job growth, jobless claims rose to a 3 month high, driving the 4 week average up to 257K. ADP reported a smaller increase in corporate payroll growth and confidence is down all around. Yet the Federal Reserve keeps saying that the labor market is improving and job gains have been solid so clearly their bar is low. The main arguments for stronger job growth in October center on disappointing numbers in September. Unfortunately the arguments in favor of weaker payrolls are not very convincing since manufacturing jobs are broken out of the non-farm report. Also fewer layoffs and continuing claims for jobless benefits does not automatically equate to more hiring. With all of this in mind last month’s leading indicators predicted stronger job growth so a rebound is possible. However in order for non-farm payrolls to help the dollar we need job growth to exceed 200K, the unemployment rate to drop to 4.9% and average hourly earnings to rise by 0.3% or more. That’s a lot to ask for and if any part of this fall short, the dollar could resume its slide ahead of next week’s U.S. Presidential Election.
Arguments in Favor of Weaker Payrolls
1. Employment Component of ISM Non-Manufacturing Index Declined
2. 4 Week Average Jobless Claims Rose to 257K from 252K
3. ADP Drops to 147K from 202K
4. University of Michigan Consumer Sentiment Index Drops to 1 Year Low
5. Consumer Confidence Index Hits 5 Month Lows
Arguments in Favor of Stronger Payrolls
1. Challenger Reports Larger Drop in Layoffs
2. Continuing Claims Drop to its Lowest Level Since June 2000
3. ISM Manufacturing Index Reports Rise in Factory Employment
As for the euro, it ended the day unchanged against the U.S. dollar. After racing from 1.09 to 1.11, EUR/USD is finding difficulty breaking above this key level as gains are capped by the 50 and 100-day SMA. The 200-day SMA is not far above those levels at 1.1175. The only report out of the Eurozone today was ECB’s Economic Bulletin. The bulletin mostly confirmed previous ECB statements that the Eurozone was growing although at a moderate pace with downside risks sill present. ECB Weidmann also spoke today, urging patience with the current economic policy for the Eurozone, saying that being ultra-loose in terms of monetary policy would increase stability risks. Early in the day, the Euro managed to touch the 100-day SMA twice, at 1.1125, but was not able to find upward traction beyond that. Upward price action however was able to keep the Euro above 1.11. The euro was primarily affected by EURGBP flows and while revisions EZ PMIs are scheduled for release tomorrow euro will primarily trade in reaction to NFPs and Election uncertainty.
The Canadian Dollar, Australian Dollar and New Zealand Dollar all booked in gains against the greenback today. The Aussie was in center focus last night with data coming from China and Australia. Caixin PMI Service reported better than expected data with a reading of 52.4 vs. 52 the prior period. Caixin PMI Composite Index also beat expectations, posting a 52.9 number beating the prior period’s 51.4 reading. AiG Services PMI posted a 50.5 reading for the month of October, an increase from the 48.9 number from September. Australia’s trade balance numbers also managed to give a boost to the currency by closing the gap with a deficit of $1227m when a $1700m deficit was expected. The Kiwi and Loonie were both beneficiaries of the over-arching anti-US Dollar sentiment of the market. Loonie was the smallest gainer of the commodity currencies, being capped by oil. Prices continued to drop 2% to below $45 per barrel, as investors were reeling from yesterday’s surge in US crude inventories. NZD continued to benefit from yesterday’s stellar jobs report and finished the day above 0.73. Australia stays in the limelight tonight as the RBA releases its monetary policy statement and retail sales data is released. Canada reports its employment data and IVEY PMI on Friday.