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The prevailing theme in financial markets as of late is once again asserting itself this morning, with global economic weakness lending to the greenback’s outperformance as broad-based USD strength dominates the tape.  Managing to shrug off yesterday’s weaker than anticipated Chicago PMI and Consumer Confidence readings as potential outliers, the main event risk on the docket (along withtomorrow’s ECB policy meeting) is the release of US Non-Farm Payrolls on Friday, with traders looking to position accordingly ahead of the print.   The knowledge that Ebola has landed on American soil in Dallas, by way of Liberia, has had little effect on equity price action, though it will be up to the CDC to contain the spread of the disease in order to keep investors optimistic there won’t be an epidemic outbreak like in West Africa.

After briefly making a run at the 110 handle overnight, the Japanese Yen is regaining some of its losses and has pulled back from the psychological resistance level.   The Tankan readings that were released overnight saw a compression in optimism from large manufacturers and service firms, with the outlook for manufacturers increasing from 12 to 13, while non-manufacturers saw sentiment fall from 19 to 13.   A key piece of the report was that capital expenditure plans were revised higher for the Q3 survey, showing large firms expected to increase spending by 8.6% compared to the 7.4% forecasted last quarter.   On balance the reports were optimistic, and the initial push higher in USDJPY has been faded with the pair slinking back into the mid-109s.

The drop in the Euro has also been shallow this morning, with the common-currency clawing back some of the weakness seen after the release of final PMI readings which showed purchasing manager activity in both Germany and France contracted from the previous month.   Assets in the periphery of the zone have been performing well despite the challenges for growth in the core, catching bid tones after reports suggested that the ECB would be dropping quality requirements in its ABS purchase program to make junk-rated debt in the periphery eligible for purchase.  Tomorrow’s ECB meeting could prove to be another pivotal turning point for the Euro, with heightened expectations from market participants for more aggressive easing or the ECB’s appetite to accept low-quality collateral, and could leave the market vulnerable to short-covering should the ECB be vague with the details surrounding the ABS purchase program.   EURUSD has been comfortable chopping around the 1.26 handle for the majority of the week, and will likely continue to do so ahead of tomorrow’s policy meeting and the market’s digestion on likely success of the ABS program.

Heading into the North American open, equity futures have been treading water for the better part of the morning, unable to generate a bid tone in an environment where profit-taking and general USD strength dominate.   The release of ADP employment numbers for the month of September, and a preview of the Non-Farm Payrolls on Friday, showed that 213k jobs were created last month, slightly better than expectations and the 202k created in August.   There has been little reaction to the numbers in either currency or equity markets, with participants still skeptical on the accuracy of last month’s ADP number that wildly overshot the NFP, and thus the greenback has been relatively steady.   The Loonie and Pound have been the best performing of the majors against the USD so far today, with the respective currencies grinding around the unchanged mark ahead of the opening bell.   USDCAD has tried a few times to generate a sustainable push above the 1.12 mark, though corporate offers are keeping the pair in check into the end of the week when Loonie traders will get fresh domestic data that could drive either a continuation or change in direction.   Still on the docket for the remainder of the session is the US ISM Manufacturing PMI, which participants will use to gauge whether it corroborates yesterday’s soft Chicago PMI, or if in fact that was just an outlier.

Further reading:

ADP Non-Farm Payrolls 213K – slightly above expectations

EUR/USD and AUD/USD could stage big corrections from lower levels – Elliott Wave Analysis