Barring Upside Surprise On U.S. Jobs, The Greenback Looks Vulnerable

Overview

The US dollar has been confined to narrow ranges today as the market awaits the October employment report. Barring a significant upside surprise, we suspect the dollar is more likely to extend this week's losses.

The Dollar Index (USDOLLAR,DXY) is off about 0.5% this week. Within the narrow ranges, it is sporting a slightly softer profile against nearly all the G10 currencies. It is also lower against most emerging market currencies, but tight ranges dominate.

Similarly, benchmark 10-year yields in Europe are narrowly mixed. They are mostly 10-13 bp lower this week, though the benchmark Gilt yield is off 17 bp. The 10-year US Treasury yield that was flirting with 5.0% recently, is near 4.65%, off 24 bp this week, ahead of the jobs report.

Asia Pacific and European equities are higher today. Hong Kong and mainland shares that trade there jumped more than 2% to lead the region. Europe's Stoxx 600 is pushing gently higher to extend its recovery into the fifth consecutive session. After yesterday's sharp advance, US index futures are off to a little heavier start today. December WTI extended yesterday's recovery slightly but remains within Wednesday's range (~$80.30-$83.40). Gold is also consolidating inside the midweek range (~$1982-$1990).

Asia Pacific

China's Caixin services and composite October PMI were reported. Recall that the official and Caixin manufacturing PMIs converged at 49.5. The Caixin services PMI rose to 50.4 from 50.2 (the official non-manufacturing PMI fell to 50.6 from 51.7). The Caixin composite fell to 50.0 from 50.9. The official composite was 50.7 (down from 52.0 in September). In some important ways, it does not matter. Beijing is engaged in two simultaneous movements - more support for the economy and more control for the Chinese Communist Party.

Increased speculation that the Reserve Bank of Australia could raise rates as early as next week helped the Australian dollar to its best level since late September. However, today's reports are a good reminder that the economy is weakening, and it follows yesterday's report that showed that exports fell for the third month in September in the past four.

Earlier this week, the final October manufacturing PMI was reported at 48.2, matching the lowest since April. Today, the final service PMI came in at 47.9 from the initial estimate of 47.6, down sharply from the 51.8 in September. The composite PMI stands at 47.6, slightly better than the 47.3, but it's still the low print this year. Separately, and more constructively, Australia reported that after adjusting for inflation, retail rose by 0.2% in Q3. Real retail sales had fallen in the past three quarters.

The dollar's low against the yen, near JPY149.85, just above the 20-day moving average, was recorded shortly after the US reported stronger than expected Q3 productivity and an outright fall in unit labor costs. This undermined the argument about wage growth driving inflation and sparked a rally in the long end of the US curve. The US 10-year yield that poked above 5.0% on October 23, recorded its low at about the same time as the dollar did against the yen. Near 4.62%, the 10-year yield reached nearly three-week low and returned to the middle of yesterday's range.

Today, ahead of the US jobs report, the dollar is confined to an exceptionally narrow range of about JPY150.25 to JPY150.55. The Aussie is also in a tight range today, holding at the upper end of yesterday's range, though below $0.6450. The Australian dollar peaked yesterday near $0.6455 in early North American trading and pulled back into support near $0.6415. It took out the October high (~$0.6445) but failed to close above it. Similarly, it breached the upper Bollinger Band (~$0.6435) but settled inside it.

The greenback edged higher against the Chinese yuan but did not move off the CNY7.31 handle for the seventh consecutive session. The PBOC set the dollar's reference rate at CNY7.1796, little changed from yesterday. The average in Bloomberg's survey was for CNY7.3134 (up from CNY7.3030 yesterday). The dollar is slightly softer on the week after settling (slightly) higher for the past three weeks.

Europe

September unemployment in the eurozone ticked up to 6.5% from 6.4% It has been bouncing between 6.4% and 6.5% since the end of Q1 23. It has not been lower during the EMU era. Still, an important takeaway from this week's activity is that the swaps market has brought forward the first rate cut. There is now about an 80% chance it takes place by early Q2, with two cuts nearly fully discounted by the end of July. By the end of next October, the swaps market has three quarter-point cuts discounted and has begun edging toward a fourth cut.

The Bank of England left policy steady (6-3 vote), as widely expected. It offered a more dour economy outlook. It now looks for Q3 GDP, which will be reported on November 10, to be flat (in August it projected 0.4% growth) and for the economy to grow by 0.1% in Q4. The BOE sees the economy stagnant next year rather than growth by 0.5% as it anticipated three months ago.

Bank of England Governor Bailey warned of a sharp fall in October CPI. UK inflation is the highest in the G7. Recall that in October 2022, CPI jumped by 2.0%. As this drops out of the 12-month comparison, the headline rate can fall toward 5.2% or so. It will be reported on November 15. Bailey argues it is too early to consider rate cuts, but not for the swaps market, which has almost a quarter-point cut discounted for August 2024.

Separately, the final services and composite PMI were slightly better with the preliminary readings of 49.5 (from 49.2 initially) and 48.7 (from 48.6), respectively.

The euro peaked a little short of $1.0670 shortly after the US economic data. The buying dried up in front of the week's high that was recorded on October 31 at $1.0675. Still, new bids emerged on the pullback ahead of $1.06. We note that the five-day moving average crossed above the 20-day moving average on October 20, and although they reconverged in recent days, yesterday's euro rally helped widen them out again. Subdued trading today has kept the euro in a tight range (~$1.0615-$1.0650), though better bid in the European morning.

Despite the BOE's dour forecast, sterling did set a new high for the week near $1.2225. On the pullback, it held above $1.2160. It has held above $1.2185 today, but below $1.2215. The trendline connecting October's two highs comes in near $1.2260 today. Last week's high was around $1.2290.

America

The US reported a 4.7% rise in Q3 productivity (after the upwardly revised 3.6% in Q2) and a 0.8% decline in unit labor costs (vs. median forecast in Bloomberg's survey for a 0.3%). It illustrates another dimension, and an important one at that, of the labor market besides the number of people working or collecting unemployment benefits.

To Fed Chair Powell's point that while the PCE deflator, which the Fed targets, is a fair measure of inflation, the state of the labor market cannot be captured in a single number. Also, consider weekly initial jobless claims at 217k are low by any reckoning, but continuing claims rose for the sixth consecutive week and at nearly 1.82 mln are the highest since April.

Today's nonfarm payroll report is front and center. The 336k increase in September was a bit of a statistical fluke and overstates the strength of US job growth. The median in Bloomberg's survey is for 180k increase today. Of course, the September gain is subject to revisions today.

As we noted when the data was published, on a seasonally adjusted basis, the US lost full-time jobs every month in Q3, though the BLS says that almost 800k jobs were created after a little more than 600k in Q2. Through September, job growth has averaged 266k a month. In the first nine months of 2022, the average monthly job gain was 438k. Average hourly earnings (which capture some imaginations but why productivity is important and why unit labor costs are a better reflection of competitiveness) may have slowed to a 4% year-over-year pace. If true, it would be the slowest rise in June 2021.

Canada also reports on last month's labor market. In aggregate, it looks like the Canadian labor market is in good shape. Through September, it created an average 43k jobs a month, of which 27.2k have been full-time positions. This is better than the first nine months of 2022, when Canada created an average 27.2k jobs of which 29.3k were full-time.

Still, there has been a marked deterioration in recent months. In the past three months, overall job growth slowed to an average of about 32.4k a month, and full-time job growth has slowed to about 16.5k a month. If one were to simply add the monthly GDP prints this year through August, the sum would be zero. There is increasing speculation that Canada is slipping into a recession (two consecutive quarters of economic contraction).

Canada's two-year yield peaked near 5% in the second half of September and early October. Yesterday, it dipped below 4.50%, a three-month low. As recently as October 9, the swaps market was pricing in another quarter-point hike before next July. Now it has a cut of the same magnitude, fully discounted.

The Canadian dollar rallied about 0.85% yesterday, its biggest advance in a few months. It was not driven by Canadian developments but by the general pullback of the US dollar. After stalling 1/100 of a Canadian cent below CAD1.3900 on Wednesday, the greenback slumped to almost CAD1.3735 yesterday. It extended the losses to slightly below CAD1.3730. On the top side, it found offers near CAD1.3760.

Nearby support is seen around CAD1.3715-20. There are about $2.55 bln in options that expire today between CAD1.3700 and CAD1.3705. The daily momentum indicators are stretched and appear to be turning lower, but a weak jobs report could encourage new Canadian dollar offers.

Meanwhile, the greenback extended its sell-off against the Mexican peso for the sixth consecutive session yesterday, reaching nearly MXN17.51. Follow-through dollar selling today has been limited to about MXN17.5060. It finished last week near MXN18.1140 and is up about 3.3% this week, the second-best emerging market currency behind the Chilean peso's 5% gain. The convincing break of MXN17.75 suggests a potential double top is in place from last month in the MXN18.4660-MXN18.4860 area.

The measuring objective of the double-top projects back toward MXN17.00. Ahead of that, the MXN17.33 area is a (61.8%) retracement of the dollar's rally from the July low near MXN16.6260. That said, the abruptness of the move has seen the greenback fall well below the lower Bollinger Band (~MXN17.6850), which cautions against chasing it lower immediately.

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.