The positive surprise in the US manufacturing ISM and the ADP report alike
combined with lower-than-forecast jobless claims and an uptick in consumer confidence in the US added to the upbeat sentiment fuelled by the rise in the Chinese PMIs on Thursday morning. This helped to lift equities in the US and Asia alike and, notably, the dollar. Friday's focus centred on the last batch of data - including the nonfarm payrolls report - before the US presidential election on Tuesday.
US bond yields were little changed in the short end, whereas the 10-30Y segment rose a few bp. Thursday, the Fed’s Rosengren joined Evans and Kocherlakota in endorsing a rule-based approach to quantitative easing, suggesting the Fed buys mortgage bonds until the jobless rate falls to 7.25% and keep the fed funds target near zero until unemployment falls below 6.5%. However, markets are likely to continue to bet on the US election outcome ahead of Tuesday’s vote, and, in turn, the chances of Bernanke being followed by a less dovish Fed chairman should Romney assume power.
In FX markets most G10 currencies are down vis-à-vis USD overnight, underlining that while the positive US data surprises yesterday improved risk appetite, the dollar has not been shredded but rather the textbook reaction to upbeat data has dominated this time round. USD/JPY extended the uptrend seen after the increase in the Bank of Japan’s asset purchase programme announced earlier this week after the minutes from the early October meeting hinted that the Bank of Japan may have to expand the programme further as the country likely entered a new recessionary phase.
Finally, Danish central bank deputy governor Callesen said in an interview, defending the current negative interest rate, that Denmark’s banks have been given the support measures they need and that facilities to support the financia system have had the intended results. Importantly, he also said that "traditionally, it’s proven effective to first shift the currency reserves by interventions and then change the interest rate," suggesting no changes to Nationalbanken’s react on function.
Danish currency reserves are due this afternoon and these will be closely scrutinised for any indications that the Danish central bank has intervened to support DKK on a wider scale, which would suggest that an independent rate hike is moving closer. We do not think this is in the cards for now though.
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