Biggest USD Drop In 21 Months, NFP Next

The U.S. dollar continued its post-Fed slide on Thursday as economic data weighed. On the day the yen was the top performer while the U.S. dollar lagged, registering its biggest monthly decline in 21 months . Nonfarm payrolls are due up next (more below). Renewed doubts with the continuity of the U.S.-China talks are weighing on markets, triggering high profile failures of the 200 and 100-DMAs in the USDJPY and U.S. 10-yr yields before considerable daily slides. Each of the 4 existing premium trades is currently in the green.

Dueling forces worked to pull USDJPY notably weaker on Thursday. The Fed pause and accompanying message highlights that it will take a ‘material’ shift in the outlook to cut rates again. Ostensibly that’s positive for the dollar but it’s negative for risk trades.

The problem was highlighted in a couple reports on Thursday. The PCE report showed spending at +0.2% compared to +0.3% expected and inflation numbers also slightly softer. The Chicago PMI also fell to 43.2 from 47.1. That was probably a result of the now-ended GM strike but the numbers both highlighted that if the economy modestly weakens, there is no safety net.

At the same time, the long-term message from the Fed was that hikes are off the table unless there is a significant rise in inflation for a sustained period. That sent Treasury yields decidedly lower and highlights that US yield differentials won’t be improving any time soon.

The next move will hinge on Friday’s jobs report. Non-farm payrolls are forecast to rise a modest 85K, down from 136K in September. After the Chicago PMI, there are growing worries that the auto strike could lead to a dismal number. If so, expect it to be a short-lived dip because those jobs have returned.

A look at the October monthly moves:

The pound led the way with a 5% rally against the dollar and 5.7% against the yen (which was the laggard). It was the worst monthly decline for the USD in over 20 months. In the stock market, most of the world put up gains in the 2-4% range including a 2% rally in the S&P 500. The FTSE 100 was slightly lower but that’s a side effect of currency appreciation. Gold was up modestly and entirely due to the rally on Wed-Thurs.

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