The main dollar pairings have eked out narrow ranges

October 6, 2016

European Outlook: Asian stock markets moved broadly higher, (Nikkei closed up 0.47% 16,899) with the recent pick up in oil prices is adding support and the front end WTI future may be down slightly on the day, but remains comfortably above USD 49 per barrel. U.S. stock futures are down as the dollar rises, but the FTSE 100 future is up, with the ongoing slide in the pound helping to underpin foreign demand. ECB tapering talk meanwhile is likely to continue to push up yields and weigh on Eurozone stock markets. Against this background the release of the ECB’s account of the last policy meeting will be watched carefully. The European calendar also has German manufacturing orders at the start of the session. Switzerland releases inflation data as well as the KoF autumn economic forecast and the U.K. has labour cost data.

FX Update: The main dollar pairings have eked out narrow ranges so far today. EURUSD has remained in a narrow orbit of 1.1200, while the yen’s recent spell of underperformance, which has been in play since mid last week following the BoJ’s announcement of a new monetary policy framework, has come to a pause today. USDJPY and EURJPY have so far remained under their respective one-month highs seen yesterday at 103.67 and 116.25. The Australian dollar has traded softer despite a narrower than expected Australian trade deficit in August, driven by firmer exports and flat imports, which, following strong figures on retail sales and building approvals earlier in the week, has added to signs that Q3 GDP will be better than previously thought. Higher commodity prices are also pointing to further declines in the deficit in the months September and October. Market focus has squared on tomorrow’s U.S. jobs report release, however, as it carries make or break potential for prospects of a Fed rate hike before year-end. Following yesterday’s U.S. data releases, Fed funds futures were showing a probability for a December hike of just over 60%.

US Data Reports: Revealed a modest setback in the August trade deficit to a $40.7 bln gap that can be attributed to a one-off service import boost from the Brazilian Olympics, alongside small upside surprises across the orders, shipments, inventory and equipment data in the August factory goods report, and a hefty September ISM-NMI pop to an 11-month high of 57.1. We also saw a restrained 154k September ADP rise. The mix left the Q3 GDP estimate at 2.5%, though with offsetting component tweaks in trade, equipment spending and inventories, alongside an unchanged 170-5k September payroll estimate for Friday with divergent signals from an ISM-NMI job index pop to 1-year high of 57.2 alongside a lean ADP reading.

Fedspeak: Lacker: said there’s a strong case to increase rates more rapidly, in his comments at Marshall University. That is in line with his remarks on Tuesday on The Economic Outlook, October 2016, and is consistent with what he, and other Fed officials, including Chair Yellen, have indicated since late August. He believes the factors that have limited inflationary pressures have largely played out, with the result that prices are moving toward the Fed’s goal. Meanwhile, he noted that the aggressive use of monetary policy to stimulate the economy can back-fire, in terms of stoking inflation, from whence he outlined the benefits and critical role of a pre-emptive policy approach. Lacker is not a voter this year or in 2017.

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