It has been a topsy-turvy day in the currency market as the dollar came back with a vengeance. The EUR/USD and AUD/USD turned negative in the second half of the U.S. trading session while currency pairs such as USD/JPY and USD/CAD recovered earlier losses. Although the S&P 500 hit fresh 15 month highs at the onset of trading, the gains faded after U.S. economic reports were released. Given the sell-off in stocks and the decline in Treasury yields, the rally in the dollar certainly smells like a pullback in risk appetite. In yesterday’s daily report we talked about how the pullback in the dollar should be temporary and as we head into Friday’s NFP release, there is a good chance that the dollar could sustain its gains as long as the Fed does not rain on the Payrolls party.
Will the Fed Rain on the NFP Party?
Tomorrow, the market will turn its eyes to the leading indicators for non-farm payrolls, which include the Challenger Layoff report, the ADP Employment report and service sector ISM. If these 3 pieces of data confirm the improvement that we have seen in jobless claims, the dollar could extend its gains on the expectation of payrolls turning positive on Friday. However traders have to be particularly careful tomorrow with the FOMC minutes which are due for release in the afternoon. The tone of the last FOMC statement was relatively upbeat and included a brand new paragraph detailing their plans to shut down a large portion of the alphabet soup of liquidity facilities in early 2010. At that time, the Fed appeared to be inching closer to tightening monetary policy. Yet recent comments from Federal Reserve Presidents suggest that central bank officials remain cautious. Therefore the tone of the FOMC minutes will could or break it for the U.S. dollar. If minutes contain a more upbeat tone like the FOMC statement, it could propel the dollar higher but if the central bank puts greater emphasis on headwinds and plans to keep interest rates low for a long time, dollar bulls could lose control.
Sharp Drop in Pending Home Sales, Factory and Vehicle Sales Rise
Meanwhile the latest reports on the U.S. economy were mixed. Pending home sales dropped 16 percent in November, the sharpest decline since the National Association of Realtors starting tracking the data in 2001. This report breaks the consistent rise in pending home sales seen between Feb and October. Given the stronger existing home sales report and weaker new home sales report, the state of the housing market is unclear. The drop in pending home sales suggests that the housing market may not be as resilient as everyone expects even if part of the falloff in demand can be attributed to the acceleration of sales ahead of the expected expiration of the tax credit. Although factory orders rose 1.1 percent, traders discounted the upside surprise after Monday's stronger than expected ISM manufacturing report. Vehicle sales were mixed with Ford and Subaru reporting a 33 percent rise in sales last month and GM reporting a 6.1 percent decline in sales. Japanese automakers did particularly well with Honda, Nissan and Toyota reporting an increase in U.S. sales. Overall the beleaguered auto industry is continuing recover, which should support the manufacturing sector.
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