As the financial community shifts its focus to the U.S. labor market, the dollar regained its mojo and is trading higher against all of the major currencies. The upside surprise in ADP Employment, trade balance and new home sales offset the drop in the non-manufacturing ISM index. In November, private payroll provider ADP reported the largest amount of job growth this year. According to their report, U.S. companies added 215k jobs in November, up from 184k jobs the previous month. The Octobers figures were also revised significantly higher, putting the release in line with the last month’s strong non-farm payrolls report. Unfortunately service sector activity slowed in November and more importantly, the employment component dropped to its lowest level since May. Based on this release, non-farm payrolls could surprise to the downside. The U.S. dollar fell initially after the report but has recovered all of its losses since then.

Payrolls were originally expected to rebound strongly in November after falling sharply in October. However to everyone’s surprise job growth in October accelerated and based on the steep decline in the employment component of service sector ISM, we now believe that payrolls rose between 150k to 175k last month. Apparently, the U.S. government shutdown had very little impact on the hiring decisions and U.S. corporations hired evenly between October and November. It would be an easy decision for the Federal Reserve to taper if payrolls rose more than 200k for 2 months in a row. Alternatively if it grew less than 125k in November they would probably keep the program unchanged this year. However the decision gets tricky if payrolls rise between 150k and 175k because arguments could be made both ways. Equity and bond traders are just as confused as FX traders with Treasury yields holding onto its earlier gain but stocks rising on the hope that the weaker ISM number will delay tapering plans.

Meanwhile the U.S. trade deficit narrowed for the first time in 4 months thanks to the record-breaking rise in exports. New home sales also jumped 25.4% in October the fastest pace of growth in 30 years. The Federal Reserve will be happy to see the improvements in the housing market and the signs of stronger global demand. While most policymakers and many investors will reserve judgment until the non-farm payrolls report is released on Friday, today’s mixed releases should limit the dollar’s rise ahead of NFPs.

The Federal Reserve’s Beige Book report will be released later this afternoon and we will be looking to see if the 12 Fed districts confirm that labor market conditions have improved since the last central bank meeting. Since the Beige Book report is compiled for the FOMC meeting, its revelations can therefore affect monetary policy. We expect the report to lend support to the greenback with Fed districts likely to report gradual improvements across the nation.

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