Leon Hinde

In the lead up to last Friday’s US Payroll (NFP) report, there were several Federal Reserve officials, as well as many market commentators, who believed that a better-than-expected jobs report would increase the likelihood of  a November rate hike. Even FED “dove “Charles Evans seemed to warm to the idea that above trend growth in employment would justify a near-term move in the Fed Funds target.

However, the less than spectacular Non-Farm Payroll report saw the odds of a November move scaled back materially, the USD lose some of its gains for the week.

We have never  really supported the speculation about further rate normalization at the November FOMC meeting. There is no historic precedent for any FED policy change so close to a Federal election and the current FED will likely want to show a political and independent posture.

In addition, the November FOMC doesn’t have a scheduled press conference nor are any updated economic forecasts scheduled for release. These scheduling issues wouldn’t completely preclude a rate hike if the recent data was extremely strong; which is not the case. On balance, the NFP report was solid even though the headline new jobs component was weaker-than-expected. Private sector jobs gained 167,000, while the participation rate rose to 63% which is the best rate since February of 2014.

Chart – US 10yr

Dow Jones

Over the past 12 months, the correlation between the EURO and Eurozone (EZ) share market has gone through several different phases. Earlier in the year, the single currency was sold off on risk aversion when EZ equities were showing weakness. A few months later, the EURO was bid higher when EZ stocks fell as fund managers allegedly unwound currency hedges while cutting long stock positions.

However, during last Friday’s LDN session, the EUR/USD tracked the German DAX index with pretty much a point-to-point correlation. As discussed in previous FX UPDATES, the legal and financial pressures on Deutsche Bank (DB), along with other EZ banks, has been a headwind for the EURO but so far hasn’t unravelled the current price or chart structure.

But last Friday was different. As the LDN session opened, the German DAX was pushed below the 10,200 level for the first time since early August. At the same time, the EUR/USD fell to the session low of 1.1160 and was well offered on the crosses. A well timed rumor that the US Department of Justice  (DoJ) was willing to lower their penalty demand on DB down to the $5.0 billion area triggered a 1.5% rally in the DAX and reversed the EUR/USD back up to near-term resistance at 1.1250.

With a full slate of data points from both sides of the Atlantic this week, FX Investors will be watching to see if this EURO-Equity connection of stronger EZ equities driving the EUR/USD higher has any staying power, or if it was just an end of month adjustment.

It’s our base case is that the DoJ rumor was just that and the market will be sensitive to ongoing litigation between the DB and the DoJ. Further, two of the key data points this week, US ISM aggregates and the US Jobs data, are both extremely currency sensitive releases which will drive USD flows.

On balance, we expect both the ISM manufacturing and services reports to bounce back from last month’s readings, which would be USD positive and SP 500 positive. The US Payroll data has been a volatile series over the last six months, but a print near the forecasted number of 170,000 new jobs should be good enough to keep the EUR/USD on a downward trajectory.

Chart – Deutsche Bank

Today’s NY close will mark both the end of September and the end of the third quarter of 2016. Often times, these month-end, quarter-end trading sessions can see broad reversion moves within long worn price ranges. With the UK current account data scheduled for release today, could month-end flows lift the Sterling into the weekend?

Doing a straight quarter-to-quarter price analysis, the GBP/USD looks overdue for a substantial recovery. The pair started Q2 of 2016 at 1.4250 and started Q3 more than 10 big figures lower at 1.3225. Over the last couple of months, the GBP/USD has been trading in an inverse pennant formation bound by the 1.2850 level on the downside and finding resistance just under 1.3500.

During the same period, the FTSE 100 has gained just over 4%, which illustrates a combination of over expectations of widespread asset devaluation post-Brexit and the re-pricing of growth assets relative to the lower Sterling.

The UK balance of payment report is first-tier data set and has been heavily influenced by the sharp devaluation of the Sterling since the June 24th referendum. Market forecasts are calling for a contraction of the trade deficit from – £32.00 billion to -£30.00 billion. And while seeing the deficit shrink by 2 billion quid may not appear to be a large improvement, it’s still materially better than blowout numbers predicted by Brexit opponents.

Chart – FTSE

EUR/USD