The price action in foreign exchange market this morning provides investors with a taste of the volatility and excitement that they can expect in currencies this week. Stronger PMI numbers from Europe, China and the U.S. lifted risk appetite across the FX market. Sterling rose to its highest level in 2 years and the New Zealand dollar is up nearly 1% today against the U.S. dollar. With the exception of the euro, all of the major currency pairs are trading higher as investors respond positively to the recovery in global manufacturing. Even the Australian dollar rebounded despite disappointing economic data.

However there is no consistency once again in the dollar’s performance even though U.S. yields have moved higher and the ISM manufacturing index surprised to the upside. This should change, as the week progress because key data such as the non-manufacturing ISM and U.S. labor market reports will shape expectations for tapering and dominate trading. Don’t forget that investors are still divided on when the Federal Reserve will taper (December or March) and this week’s economic reports are important enough that they can alter expectations, starting with this morning’s ISM manufacturing index. Despite weaker manufacturing activity in the NY, Philadelphia and Chicago regions, manufacturing production accelerated across the nation with the ISM index rising to 57.3 from 56.4. This was the strongest pace of growth since April 2011 and the rise in orders in particular is very positive for the U.S. recovery. If we continue to get these upside surprises in U.S. data this week, investors will skew their positions for December tapering, leading to further gains in the dollar.

We have 7 central bank monetary policy meetings on the calendar, the non-farm payrolls report, the Beige Book and speeches by a number of U.S. policymakers. The Reserve Bank of Australia, National Bank of Poland, Bank of Canada, European Central Bank, Bank of England, Norges Bank and Banxico (Mexico) are all expected to leave monetary policy unchanged but the accompanying statements and press conferences could still trigger big moves in the respective currencies. If the RBA or the ECB suggests that additional stimulus is possible, EUR/USD could drop below 1.35 and AUD/USD could test 90 cents.

With the U.S. government reopening in November, this month’s NFP report was expected to show a snapback in job growth. However last month’s 204k rise in payrolls exceeded the expectations of the most optimistic economist and because of that they are now looking for job growth to slow in November. If they are wrong and payrolls rise by more than 200k (190k would even do the trick), the unexpected strength of the labor market will prompt traders to readjust their positions for sooner rather than later tapering and this would be positive for the dollar. In fact, an upside surprise in non-farm payrolls report could be just what USD/JPY needs to break its 4 year high of 103.74 but the breakout could occur sooner if the leading indicators for NFPs also point to a stronger number.

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