USD Jumps As Traders Pared Positions In Risk Markets Ahead Of Elections

When we're seeing New Zealand dollar being the strongest currency last week while the Japanese yen was the weakest, we might have thought that the week was blessed with strong risk appetite. Indeed, it was to an extent, until markets reversed shortly after better than expected non-farm payroll data from US. Friday's sell-off had Dow erased all of its gains in a hurricane shortened week.

Gold has indeed dived over -2% on Friday to lose below 1700 at 1678.4. On the other hand, the dollar index broke through its 55 days EMA decisively to close at 80.59, highest close since early September. It seems that the string of positive economic data released on Thursday and Friday were used as a opportunity to lighten up position in risk markets ahead of US presidential elections.

Technically, firstly, rebound in Dow last week was corrective looking and has finished. The fall from recent high of 13661.87 is set to extend lower and would likely break through 13000 psychological level. Secondly, strength in commodity currencies was far from being impressive. AUD/USD has barely breached 1.04 very briefly and looks set to head back to 1.0235.

USD/CAD's retreat from 1.0019 was rather shallow and corrective looking. Thirdly. European majors were weighed down by stalemate in Greece and Spain and euro was indeed the weakest one among them. However, European majors would likely stay in recent range against dollar rather than breakout in near-term. Fourthly, after brief volatility, the Japanese yen stayed weak after BoJ expanded its easing program. Though, the momentum in EUR/JPY and GBP/JPY was quite unconvincing.

So overall, we'd slightly prefer to short AUD/USD in the near-term and keep an eye on stocks and gold to see if their respective sell-off continues. Should risk markets stabilized and rebound, which is not very likely in the early part of the week, we'd turn to USD/JPY long.

To recap, nonfarm payroll report showed 171k growth in the US job market in October, much better than consensus of 120k. September's figure was also revised up from 114k to 148k. Unemployment rate edged higher fro 7.8% to 7.9% as expected. ISM manufacturing index unexpectedly rose to 51.7 in October. Consumer confidence rose to 7.2.2 in October. The data has boosted market sentiments briefly. Talks of the US "fiscal cliff" have been heated up again as we approach the year end. Although the actual expiration of tax cut and activation of reduction in government spending would begin in 2013, the country's economy has already been affected.

If the government makes no concession and all Bush-era tax cuts expired as scheduled, this could extract as much as USD 600B from the economy, around 3-4% of GDP in 2013. However, the situation might actually be more severe as the IMF's latest report suggested a USD of deficit reduction could drain as much as $1.70 (IMF's forecast: 0.9-1.7) from the economy, compared with the above 1:1 assumption. US presidential election will be the main focus this week and latest poll showed that Obama and Romney are almost tied with Obama just slightly ahead in some swing states.

The euro extended it's corrective fall against dollar last week on stalemate in Greece and Spain. After a conference call, Eurogroup of finance ministers issued a statement urging "Greek authorities to solve remaining issues so as to swiftly finalize the negotiations with the troika institutions." And, the officials emphasized that release of the next round of money "was subject to the completion of prior actions by the Greek authorities." German finance minister Schaeuble said that "there are a lot of difficult issues that still need to be resolved: and the next report by the Troika wouldn't be ready before November 11.

There is still no news about Spain's bailout even though the coming ECB meeting this week will be the second one after OMT announcement. Spain's GDP contracted less than expected by -0.3% in September, comparing to prior estimate by Bank of Spain at -0.4%, also provided some support to sentiments. ECB Nowotny said that there is no need for an imminent bailout for Spain as "the government is fully financed until the end of this year." And he said that the OMT is a program with "very strict conditions" and he could "imagine that this is one of the aspects that is on the minds of the Spanish government."

Economic data from UK was rather mixed. Though, those data was overshadowed as the Confederation of British Industry upgraded UK economic forecasts in its latest report. CBI projected that UK economy will stagnate this year and grow 1.4% in 2013. That compared to August projections of -0.3% contraction in 2012 and 1.3% in 2013. Also growth is expected to rise further to 2% in 2013. CBI Director General John Cridland, though, sounded cautious and noted that the rebound from recessions was partly due to Olympic and the economy is still vulnerable.

He said that "risks are on the downside. It's more likely than not that European policy makers will continue to do enough to keep the eurozone together, but there has to be a risk that slows down global growth." Development in EUR/GBP argues that sterling could be the relatively stronger one among European majors in the near-term. BoE will meet this week and would likely be a non-event.

SNB said in its quarterly report that it lowered its euro reserves to 48% at the end of September. That's a significant drop comparing to 60% at the end of June. Holdings of the US dollar, British pound, Japanese yen and Canadian dollar were increased during the period. SNB spokesman Walter Meier said that the drop in Euro reserves "reflect a rebalancing, which brought them down to our desired long-term level of around 50%". Meanwhile SNB also said it had CHF 16.9b profits for the nine months through September with CHF 94m gain from franc positions and CHF 6.2b gain in gold assets.

The Bank of Japan expanded asset purchase for the second consecutive month as a means to stimulate the country vulnerable economy. Policymakers announced to leave the overnight call rate unchanged at 0.01% and will expand the asset purchase fund by 11 trillion yen to 66 trillion yen. It also decided to keep its credit loan program at 25 trillion yen. The move had been widely anticipated and there's still possibility that the central bank would add more easing early next year.

China's manufacturing PMI improved to 50.2 in October, up from 49.8 a month ago, signaling the country's manufacturing sector returned to the expansionary territory. Components of the data also suggested that that the government's monetary easing has fed through the economy. Meanwhile, the employment situation appeared to be firm despite economic slowdown. Going forward, we expect policymakers would feel less urgency in adding stimulus to the market while the new leaders would likely maintain the current monetary stance.