Grinding lower
The key currency pairs of GBPUSD and EURUSD continue their slow but consistent grind lower. This story is not just one of dollar strength but also a rotation away from GBP and EUR, in favour of safe havens. Under performance in global equity markets continues to be a factor behind the market’s general risk-off tone and bias towards defensive positioning. This theme was extended further yesterday with the publication of the ADP jobs report.
The ADP jobs report is typically published a couple of days prior to the more important non-farm payroll data. Depending on one’s predisposition, this can be seen as a useful prelude to non-farms on the first Friday of every month or just unhelpful noise. Regardless, it usually plays a questioned and overlooked second fiddle to NFPs. However, in the absence of the majority of public data releases given the ongoing US government shut down, the ADP publication was closely watched yesterday. It showed a modest overshoot versus the forecast for the number of jobs added last month. 42,000 is not an impressive number by the standard of monthly US job creation. However, at nearly double the forecast, this may be sufficient to give the Fed the required confidence to focus on residual inflation rather than the labour market, a scenario which would be supportive of the Dollar.
In this risk off and defensive environment, markets will continue to favour safe havens including the Swiss Franc and Japanese Yen. Given the valuation of the former and the respective authorities’ positions on that valuation, JPY is the more plausible safe haven bid for the foreseeable. Given the recent performance of equity markets, it is more likely than not that any further weakness will continue to be tolerated and only generate modest demand for the Dollar and safe havens. The Bank of England will publish its latest monetary policy decision this afternoon. It is not implausible but remains unlikely that the Bank will cut rates. Even if they don’t, any dovish words will be sure to see Sterling test it support levels which remain just below current spot pricing on many pairs.
Discussion and Analysis by Charles Porter
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