Australian, New Zealand and Canadian Dollars All Hit By Carry Trade Liquidation (page 1 of 2)

DailyFX Fundamentals 11-01-07

By Kathy Lien, Chief Strategist of DailyFX.com

US Dollar Rebounds, Dow Falls 360 Points: How are Traders Positioned for Payrolls?

The US dollar rebounded significantly today partly in reaction to Wednesday's Federal Reserve interest rate decision and partly in anticipation of tomorrow's non-farm payrolls report. Once again, bond traders got it right. Yesterday, even though bond yields increased the stock market rallied and the US dollar sold off. The reaction in the equity and currency markets suggested that traders thought the Fed was more dovish than hawkish while the reaction in bonds suggested otherwise. Today, the equity and currency markets have finally caught up with the bond market, with the Dow down over 300 points and the US dollar up across the board. Now that should be the correct reaction given the Fed's slightly more hawkish leaning yesterday. The combination of strong GDP growth and the prospect for a sizeable increase in payrolls has many journalists calling yesterday's interest rate cut the last. Economists beg to differ however and Fed fund futures indicate that there is still a greater than 50 percent chance for a December rate cut. In the immediate future, equity and currency traders are both positioned for a strong payrolls report. With the market so divided, NFPs could decide not only who is right, but also whether the US dollar has hit a bottom. The market is currently looking for 82k jobs to have been created in the month of October. However following the sharp increase in the ADP report and the drop in layoffs according to Challenger, the whisper number is far higher (125-130k). If job growth is anywhere near 125k, expect a sharp dollar rally, but if it is below 90k, speculation of a December rate cut will return. The arguments in favor of strong payroll growth far outweigh the arguments supporting weak growth. Not only did private sector payrolls increase materially last month and layoffs dropped, but the Hudson Employment index, Monster.com Employment Index and Help Wanted Ads all jumped. We do not get the service sector ISM report until Monday, which is after payrolls, but the employment component of the manufacturing ISM report hit the highest level since April. The only reasons why payrolls could be weak is the rise in jobless claims and fall in consumer confidence. If the labor market is really recovering, confidence would not be the weakest in 2 years. There are still a lot skeptics out there who do not believe that the US economy has seen its worst and it all boils down to what non-farm payrolls will mean for interest rates. If there is a reason for traders to believe that the Fed will continue to lower interest rates, then the current recovery in the US dollar will turn on a dime. Nothing is certain until we see payrolls and even then we need to watch how the market reacts to it.

Is the Swiss National Bank Endorsing Carry Trades?

The liquidation of carry trades has sent the Swiss franc higher against the US dollar, Euro and British pound, but carry trade related flow may not be the only reason why the Swissie is stronger. After falling to a 21 month low, Swiss manufacturing activity rebounded last month. It is now at 60.7, well within expansionary territory. Tomorrow, consumer prices are due for release and we expect the weakness of the Swiss franc to drive CPI higher, but that may not be enough to prompt the Swiss National Bank to raise interest rates. SNB board member Thomas Jordan said today that even though they remain vigilant on franc weakness, they do not see any signs of the franc stoking inflation and rate differential still favors carry trades.