Central Banks and Jobs to Squeeze Forex Positions

In Capital Markets it's another busy week for central banks with the Reserve Bank of Australia, the Bank of England and the European Central Bank holding their regular policy-setting meetings. Governor Stevens at the RBA will get to put the market through its paces come Monday evening, November 3. The Governor has a tendency to try and talk the Aussie dollar down (AUD$0.8744) at every opportunity. Perhaps he will try and match his colleagues at the RBNZ who did a good job walking the Kiwi (NZD$0.7782) down last week with their “dovish” comments.

Both the BoE and ECB will be keeping the market on their toes come Thursday, November 6. Will we get further directives on Draghi and company's QE program? Growth momentum in the U.S. has been relatively robust, while the Eurozone, on the other hand, continues to deliver relatively weaker economic data. This will obviously put further pressure the ECB to do more easing, especially following the BoJ's move late last week. For the sovereignty issue program, expect that to be delayed until the EU political quagmire finally unravel.

Finally, the market gets to close out this busy week with the ‘granddaddy' of economic indicators U.S non-farm payrolls. Just north of the border, the Canadian employment numbers will be released at the same time. With Ms. Yellen and her colleagues at the Fed changing tact and have since been pumping up the U.S labor situation, Friday's jobs report becomes that bit more significant for the mighty dollar. Any slight deviation from expectations should have a far greater market impact than recent U.S employment releases. So, no matter what, investors should be expecting the market to be on tenterhooks come Friday.

China releases softer data

It's not a surprise to see the markets start this week in a consolidating mood, especially after last's week's euphoria following the surprise BoJ ease that led the ‘big' dollar to a multi-year high against a host of currencies. Japan's surprise stimulus move allowed global equities to rally on the back of higher risk sentiment, commodity prices to slump because of a stronger greenback, while at the same time getting fixed income traders to second guess the shape of their own curves.

Nevertheless, various sovereign bond prices are advancing this morning (particularly bunds and treasury's), mostly on the back of China's PMI data coming in soft over the weekend. The official Government October manufacturing print came in at a five-month low (50.8 vs. 51.2 estimate), which happens to be the third straight month-over-month decline. While the non-manufacturing print managed to record a new nine-month low (53.8 v 54.0 prior). Perhaps more importantly for now, the headline releases still remain in expansion territory. Finally, the HSBC manufacturing PMI matched consensus (50.4) and hit a three-month high, which also happens to be below the official print. The markets read is that despite the manufacturing sector continuing to stabilize on the month, the consecutive momentum has “likely weakened” in the world's second largest economy.

Euro's mixed bag of data

Major European PMI Manufacturing data for October this morning were mixed. The 18-member single currency went into the last month's PMI run around €1.2495, and has come out, thus far, relatively unscathed despite the mixed bag of headlines. Spain was unchanged from September at 52.6, Italy slipped into contraction at 49.0 from 50.7, France dipped to 48.5 from 48.4, while not much of a surprise is seeing Germany back in expansion territory at 51.4 from 49.9, while the Eurozone as a whole improved to 50.6 from 50.3. With numbers like these, the market genuinely feels that ECB QE is inevitable or unavoidable at some future point; the ECB will eventually be squeezed to act radically from their perspective, especially when other major Central Banks (BoJ) keep lending support. On Thursday, the market expects Draghi to send a strong signal that significant balance sheet measures should be coming as early as next month.

The market is short the EUR and it feels that too many individuals expect the single currency to make a “beeline” for July 2012 lows near €1.2000. Directional play rarely gets to work out that easily. Currency moves do not go in a straight line and the longer that EUR gets to waffle near its yearly lows the more impatient the weaker EUR “shorts” become. Despite the EUR heading towards its two-year old extremes, the market still requires a healthy shakeout to lend stronger support for its “negative” momentum trend. Do not be surprised to see better levels to sell the single currency. But remember, bleaker eurozone growth prospects and the markets dominance of negative EUR sentiment would suggest that any EUR rallies could be rather fleeting.

U.K to focus on exports

Across the English Channel, the stronger than expected U.K manufacturing PMI report this morning (53.2 vs. 51.5) will most likely be ignored as the markets attention should again be focused on the country's weakening export picture. New-export orders PMI happened to fall to 48.3 from 49.6 in September and are atop of its lowest level in nearly two-years. The weaker data should lend a hand to the BoE doves and keep U.K rates “lower for longer” come decision time this Thursday.