Thursday, November 5, 2009

ADP, ISM FOMC Preview



Watch the 200K Mark in ADP

The Oct ADP survey on private payrolls (13:15 GMT) is expected at -190K after -254K and -277K in Sep and Aug respectively. Markets may watch whether the ADP decline falls below the 200K would dampen current gains in US equity futures.

That could especially be the case in the event that the
Oct services ISM (15:00 GMT) falls short of the expected 51.5 figure, following 50.9 and 48.4 in Sep and Aug respectively. Said differently, risk currencies and equities may resume their Wednesday rebound in case of an ADP reading better than -200K and ISM above 51.5. Also watch the new orders andemployment components of the ISM, both of which improved in Sept to 54.2 and 44.3 respectively. A rise in the employment component coupled with a sub -200K reading in ADP could be especially positive for GBP, CAD and EUR.

“Exceptionally low … for extended period”

Markets may also scrutinize whether today’s FOMC statement maintains “exceptionally low levels of the federal funds rate for an extended period”. Any adjustment in the “timing” element of this phrase could be interpreted as a signal towards earlier exit strategy, which appears unlikely at this time.

We may see minor adjustments regarding the economic assessment but notable change in the reference to the program of agency MBS purchases appears unlikely. Recognizing the stabilization in the housing sector and financial markets may once again be offset by a more constrained outlook with regards to jobs, credit and income growth. With regards to
inflation, the FOMC seems to have no reason to depart from its current outlook on price growth being “subdued” and cost pressures dampened.

GBPUSD rallies past the $1.6530s after UK services PMI surged to a 26-month high in Sep at 56.9 from 55.3. Markets appear split between whether the BoE will expand QE by an additional £25 bln or £50 bln. The reason some expect £25 bln is partly related to avoiding excessive sterling weakness, especially with major central banks seeking to adopt gradual steps towards policy normalization, the BoE might not want to push further into the extreme side of the easing spectrum.

GBPUSD may test the $1.6575-80 resistance in the event of appetite-friendly US data. Any additional gains may become capped at $1.66 on market cautiousness ahead of tomorrow’s BoE decision.

EURUSD
seems to require positive US data for risk appetite to lift it above $1.4800, but the $1.4835-40 resistance may impose itself as long as the FOMC does the unlikely action of extending its asset purchase program. Some appear sceptical with the euros’ recent price action, especially as it has not closed above $1.4770 since last week. Any disappointment from US data could trigger further downside towards the $1.4680 support, with a 60% chance probability for seeing $1.4550 before week’s end./

Aussie lags behind after an unexpected monthly decline in Australian retail sales (-0.2% from +0.9%). Considering yesterday’s “dovish rate hike” from the RBA, AUDUSD and AUDJPY could become the primary losers from any recurring wave of risk aversion. AUDUSD faces interim resistance at 0.9130, followed by 0.9220, with downside support standing at 0.8950. We still call attention to a looming potential break of the 2-month trend line support at 0.8930, after which emerges 0.8850 and 0.8680.
AUDJPY attempts a recovery above 83.00 but any emerging gains appear capped at 83.30, while support holds at 81.00.

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