After taking a breather, the USD has regained its mojo partly driven by concerns over other currencies along with a supportive domestic backdrop. GBP has been the big G10 underperformer overnight (hence Nicki Minaj’s song title for today) amid rising political concerns, a theme which has also weighed on EUR and soft data has been the driver for AUD and CAD underperformance. Meanwhile US equities have continued to climb higher (eighth consecutive day of gains), US data releases again yielded positive surprises and Fed speakers reinforced the message that further rate hikes should be expected.

So the USD is dollar is stronger across the board with DXY and BBDXY up 0.54% and 0.57% respectively. GBP is the biggest loser, down 1.01% with the declines over the past two weeks effectively reversing all the gains from mid-September triggered after the BoE signalled its bias to lift rates before year end. Cable has come under pressure amid dwindling support for PM May with the prospect of a new leadership contest further delaying Brexit negotiations. The bad news for the UK economy don’t stop there with the FT running a story of “ a bloodbath” in public finances ahead of the Budget next month and the Royal Mail union has announced its intentions to strike later this month amid pension, pay and job disputes. Further GBP weakness looks like a safe bet at the moment.

After yesterday’s softer than expected retail sales the AUD fell from 0.7863 to 0.7830 and traded around that level in the early part of the overnight session. Then as the USD regained its mojo, the AUD fell below the figure and now trades at 0.7791. Yesterday’s retail sales report revealed broad weakness across store sectors and states, though food was a standout (cafes, restaurants and takeaways -1.3% m/m. But our economists think there is little reason to believe this should continue given the rising population and job creation. The data may have also been affected by the sample, so in this regard some payback should be expected next month.

Ahead of payrolls tonight, the AUD is likely to trade in a tight range with initial support seen at 0.7780 and then at 0.7740.That said the resurgence in the USD means that the big level for the AUD is the support around 0.7690. A break through that level would open the door for the AUD to trade towards 0.75c.

CAD was also an underperformer overnight (-0.76%), currently trading at 1.2571 after Canada’s trade deficit unexpectedly widened in August. EUR has not been immune to the strength of the USD with Catalonia’s intentions of independence still dominating the EU headlines. EUR is down 0.50% overnight and currently trades at 1.1702. An earlier report suggested that some sort of brokered deal might be done between Catalan and Spain’s leaders that avoids the economic calamity of some illegally declared secession of the region.  But Catalan separatists have again reiterated their plan for a debate in Parliament on Monday, defying orders from Spain’s government.

The USD was also aided by a rise in UST yields amid hawkish comments from Fed speakers and better that expected trade and jobless claims data. Fed Williams (non-voter) said that he is optimistic on inflation rising to 2% and is confident that “rates will need to rise to their new normal levels”. Echoing Yellen’s view Williams also added that he doesn’t need to see an actual move up in inflation to justify another rate increase. Meanwhile Fed Harker (voter) said that he had “pencilled in” a move in December and three hikes next year, in line with the median FOMC dots.

Fed Powell, a contender for the Fed Chair, was also speaking last night and he yet again reinforce his deregulation bias noting that “There is certainly a role for regulation, but regulation should always take into account the impact that it has on markets — a balance that must be constantly weighed. More regulation is not the best answer to every problem. There is also a role for a body such as the TMPG to address market problems”. On paper Powell appears to tick most of Trump’s boxes, continuity, dovish and pro deregulation and the fact that he doesn’t have a Phd is offset by his Fed experience and good track record as a governor.

Coming Up

We have a light calendar in our APAC region as well as in Europe with market focus undoubtedly on the US employment report tonight. For the record, this morning Australia gets the September AiG Performance of Construction Index, later in Europe Factory orders are out in Germany and the Halifax House prices are published in the UK.

Looking at the Bloomberg distribution of economist estimates for non-farm payrolls tonight, the uncertainty surrounding the impact from recent hurricanes is pretty evident by distribution of forecasts. The median estimate is at 80k, but the lowest estimate is at -40k while the highest is at 260k. Ignoring the tails, the +/-1 standard deviation has a range of 36k to 126k. So still a fairly wide range.

All that said, ISM readings this week as well as the ADP report point to modest activity impact from hurricanes. This would suggest that the risk for tonight is that we get a stronger print than the 80k expected by the median estimate (non-farm payrolls readings have averaged 178k so far this year).

The unemployment rate is expected to remain unchanged at 4.4% and average hourly earnings are expected to rise 0.3% mom up from 0.1% previously while the yoy reading is seen unchanged at 2.5%.

A positive employment report tonight should provide a boost to the USD and lift UST yields, but the constraint reaction to the positive data prints this week suggests that gains tonight might be tempered by overhanging concerns over Trump’s imminent Fed Chair announcement as well as developments over Tax Reform.

Overnight

On global stock markets, the S&P 500 was +0.56%. Bond markets saw US 10-years +2.15bp to 2.34%. In commodities, Brent crude oil +1.50% to $56.96, gold-0.3% to $1,270, iron ore -0.9% to $61.48, steam coal -0.4% to $98.65, met. coal +0.6% to $180.00. AUD is at 0.7793 and the range since yesterday 5pm Sydney time is 0.7787 to 0.7865.

For full analysis, download the report:

• Markets Today:6 October  2017 (PDF, 118kb)

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets

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