NEWS / Foreign Exchange

Dollar Shrugs Strong ADP, GDP Ahead of Anticipated Fed Easing

Despite the comforting reports on ADP and GDP, currencytraders are unlikely to make any significant paring of dollar shorts ahead of the anticipated 25-bps rate cut by the Fed this afternoon. More FOMC analysis belowbelow

The 106K increase in the October ADP on private payrolls is significantly higher than expectations of 60K, following a revised 61K in September, which is a much needed positive for the ailing dollar going into the much anticipated 25-bp rate cut later this afternoon. The accuracy of the ADP report in predicting the direction of non-farm payrolls has improved markedly over the last three releases, as the ADP figures were largely reflected into the BLS data. Note that the September ADP rose to 60K from 27K in August, while the NFP rose to 110K from 89K over the same months.

The 8.30 am advanced release of the Q3 GDP showed a greater than expected 3.9% increase following a 3.8% rise in Q2 thanks largely to a 3.0% increase in personal expenditure and a signifigant 11.0% increase in net exports (versus expectations of 7% and previous 4.8%). Although advanced GDP reports are based on incomplete data, the +3.0% handle in PCE is a vital source of support for the US economy and the dollar as it sustainable spending fuel by the US consumer. Nonetheless, the spending outlook may change when we obtain more current data at tomorrow??™s release of September personal spending, expected to slow to 0.4% from 0.6%. Dollar gains are seen limited against EUR, GBP, AUD, CAD in the event of a GDP figure between 3.2% and 3.5%, but less limited against the yen, where a 115.40 handle is viable.

The 9.45 am release of the October Chicago PMI is expected to slow to 53 from 54.2. Markets will carefully watch the new orders and employment components of the index. New orders slowed to 56.2 in September following 58.4 and 53.4 in August and July respectively, while the employment index fell to a 5-month low in September at 52 from 53.7 and 61.6 in August and July respectively.

The 10 am release of September construction spending is expected to show a 0.5% decrease, following +0.2% rise, -0.5% and -0.1% in Aug, Jul and Jun respectively. On a year to year basis, spending are seen down 1.0%, following -1.7%, -2.4% and -2.8% in the prior 3 months.

The 2:15 pm Fed decision is expected by the markets to make a 25-bp rate cut at a 94% probability, in which case US equity indices may be neutral to negative, while the dollar??™s losses are seen continuing largely against the EUR, GBP, CAD and NZD and to lesser extent against the JPY. Nonetheless, in the even that the stock market??™s reaction shows losses of greater than 1.3%-1.5% (in case of a less dovish FOMC statement), then we could see sharper declines in USDJPY, but more modest dollar retreat against the EUR, CHF and CAD as risk aversion leads to unwinding of dollar shorts. In the unlikely event of no change in interest rates, USDJPY is seen making a knee jerk upward reaction, but possible sell-off in equities of more than 2.0% will likely cap USDJPY. The reaction in EURUSD, GBPUSD and AUDUSD, is expected to be sharply positive for the USD, with gains of as much as 70-80 pips seen ahead.

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