Talking Points:

US Dollar Broadly Higher Before September’s Payrolls Data Hits the Wires
Commodity Bloc May Weaken as Yen Gains if Jobs Report Tops Expectations
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The US Dollar moved broadly higher in overnight trade, adding as much as 0.2 percent on average against its leading counterparts. Like yesterday, prices action appeared to reflect pre-positioning ahead of key event risk rather than a discrete concurrent catalyst. With the ECB rate decision behind them, traders are now focused entirely on the outcome of September’s US Employment report.

The object of speculation remains the survival of the “risk-on” theme in place since mid-2012 and arguably driven by generous Fed stimulus. Investors are concerned that the imminent end of QE3 asset purchases later this month may cap the move, opening the door for risk aversion. Hopes of solace in an aggressive easing effort from the ECB as a replacement for the US central bank were disappointed as Mario Draghi and company dithered. This leaves markets to wonder whether a soft jobs report can feed bets that the Fed will be relatively slow to raise interest rates after QE3 concludes.

Expectations call for a 215,000 increase in nonfarm payrolls in September, up from a disappointing 142,000 in the prior month. The latter number was widely dismissed on the grounds that initially weak August results have been consistently revised away in subsequent months in recent years. Evidence supporting or disputing this narrative may prove just as important as the headline figure this time around.

On balance, leading survey data looks encouraging. Job creation in the service sector accelerated to the highest pace since June while hiring on the manufacturing side of the equation grew at the fastest rate since March 2012. If this proves to foreshadow an upbeat payrolls figure, bets on the swift arrival of monetary tightening are likely to drive the greenback higher. Sentiment-sensitive Australian, Canadian and New Zealand may suffer most in this scenario while the safe-haven Yen advances as fears of imminent stimulus withdrawal undermine risk appetite. Needless to say, a soft result stands to produce the opposite dynamic.

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