Dollar Retreats Slightly Ahead of FOMC- ADP Key?

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Market Drivers for October 30, 2013
Aussie stages a comeback on option expiry and month end flows
German unemployment improves
Nikkei 1.23% Europe 0.63%
Oil $97/bbl
Gold $1347/oz.

Europe and Asia:
AUD Home Sales 6.4% vs. 3.4%
CHF KOF 1.72 vs. 1.56
EUR GE Unemployment 2K vs. 0K

North America:
USD Fed Funds 2:00 PM

The dollar was slightly lower against the high beta currencies in Asian and early European trade today ahead of the monthly FOMC meeting due to conclude at 1800 GMT. In what was generally lackluster dealing, the greenback lost some ground as better risk flows, end of month squaring and option expiry pressures all weighed on the unit.

The AUD/USD was one of the bigger gainers as the pair tested the bids around the 9450 level and then rebounded strongly to recapture the 9500 figure. The Aussie has a significant amount of option expiry today at the 9500 level as well as month end flows in the EUR/AUD
pair and both of those factors conspired to lift the unit.

The AUD/USD was also helped by better housing data Down Under with New Home Sales showing a jump to 6.4% from 3.4% the month prior.The pair has already corrected more than 2% off its recent highs and may consolidate around the 9400-9500 support levels for the time being.

Meanwhile in Europe the economic news was generally positive with German unemployment data showing only a very modest uptick to 2K from 1K eyed as last months data was revised slightly down to 24K from 25K. The unemployment rate remained at 6.9% indicating that labor markets in Europe’s largest economy remain steady. The EUR/USD rebounded to 1.3760 from 1.3730 earlier in Asian trade as markets positioned for the FOMC press release.

Before the marquee event of the week, the currency markets will get a glimpse of the ADP report at 12:15 GMT at the open of North American trade. This will be the first look at the impact of the US government shutdown on US labor demand with consensus calling for a slight decline in job growth to 151k from 168K the month prior. However, if the ADP comes in significantly weaker it could have as strong impact on currency trade.

One of the key pillars of the Fed’s taper policy is steady and growing employment data. If the news today shows a serious deterioration in labor demand then currency markets could begin to price in the prospect of a delay all the way to Q2 of 2014. The dollar therefore could weaken further as sentiment towards US economy sours.

Boris Schlossberg
Managing Director

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