Is the Dollar Sell-Off Over? It Depends on Payrolls (page 1 of 2)

US Dollar - Is the sell-off in the US dollar over? Probably not over the long term, but in the short term, it could very well be over if tomorrow's non-farm payrolls release prints strongly. The US dollar is finding support against most of the majors except for the Euro, which has benefited from the surprisingly hawkish comments from the European Central Bank earlier this morning. Despite another round of mostly weak US economic data, the dollar is having a hard time falling further.

At this point, the market is no longer surprised by weak economic data, especially from the manufacturing sector. Non-farm productivity, factory orders and jobless claims all came out weaker than expected. The only upside surprise was in unit labor costs which confirmed the similar rise that we saw in the Employment Cost Index earlier this week.

Although a rise in labor costs is inflationary, with energy prices remaining very low and core prices following slowly, the Federal Reserve is probably far more concerned about growth at the moment than they are about inflation. Furthermore, whenever labor costs rise, it is also a burden for businesses. Instead, tomorrow's non-farm payrolls print will be extremely important. With only 51k jobs created in the month of September, anything short of a triple digit print will be perceived as very bearish for the US dollar.

Analyst estimates are all over the place with the highest forecast being 180k and the lowest forecast at 72k; the median is 123k. Of the 76 analysts surveyed by Bloomberg, 20 percent of them are calling for a double digit print. We believe that it would be quite disastrous to see anything less than 100k and judging from economic data has already been released, this downside surprise will probably not materialize. Jobless claims have been very low for the past month while the ADP payroll and Hudson employment indices surprised to the upside.

The only risk we see is from the real estate and housing market. Construction activity has been falling and we are sure that jobs related to that industry such as real estate agents and mortgage brokers are also suffering. Either way, with the US dollar at a very important support level, non-farm payrolls should help determine whether we will see a bit more of a bounce or further losses.

Euro and Swiss Franc - The Euro was one of the few currencies that managed to rally against the US dollar today thanks to very strong comments from ECB President Trichet. Repeating that strong vigilance is needed to tackle inflation, Trichet was also very confident about growth and weary about the upside risk to inflation.

The fact that he bypassed a rate hike today explains why the Euro only saw a modest rally. At this point, a December interest rate hike is practically guaranteed. However Trichet refused to provide much guidance beyond that which means next month's monetary policy meeting will really be the one worth watching. Stronger economic data also helped the Euro register gains. The region's overall manufacturing index increased from 56.6 to 57.0, led by improvements in Italy and France. German manufacturing conditions was slightly weaker, but that was offset by a sharp fall in unemployment claims in the month of October.

Overall, the mixed data that we have seen in recent weeks suggests that even though the Eurozone may be vulnerable to growth in the US, so far, it is holding up fairly well on its own. Meanwhile Swiss consumer prices were much weaker than expected in the month of October.