The US dollar sinks as the Fed stays put and NFP disappoint

Over the first few days of November, the dollar finds itself in serious trouble. The US currency has failed to get wind in its sails from the Federal Reserve, and is being dragged down by disappointing data from the US economy. Both the ISM indexes reflecting sentiment in services and manufacturing and the labour market report disappointed. As a result, the EUR/USD is rising towards 1.0750.

The non-farm sector added 150,000 jobs in October, 30,000 fewer than the market consensus forecast. Moreover, the figures for September and August were revised downwards by a total of 100,000 jobs. In addition, the unemployment rate rose and reached 3.9% for the first time in several months. The only strong point in the monthly series of readings was information on wages and salaries, but more was needed to avoid a deepening of the dollar's discount. The series of weak data translates not only into a retreat against the USD but also a broad-based improvement in investment sentiment.

Stocks and bonds have been appreciating intensely. The S&P 500 index rose by almost 6% last week. Yields on 10-year US Treasury bonds, which had recently breached 5%, fell back by more than 40 bp. The valuation of the likelihood that the Federal Reserve will resume its tightening cycle in December has diminished to less than 10%. If the Fed did not raise rates when the economy was surging, it is even less likely to do so when the first signs of breathlessness appear.

The EUR/USD pair pulled itself out of the downtrend a month after reaching long-term lows. It is trading around 1.0750, almost 3% above the lows of a few weeks ago. The US dollar appears to have room to weaken against the main currencies by a minimum of 1.5-2%. The recent reshuffle fits in with Conotoxia's currency forecasts, assuming that the euro-dollar exchange rate will be in the region of 1.09 by the end of the year.

Under such circumstances, emerging market currencies become attractive again. However, the EUR/PLN may have exhausted its downward potential after the around-election surge and find itself on the sidelines of a so-called relief rally and euphoria among investors. The Polish currency should be viewed neutrally. We expect the euro exchange rate to remain in the recent range of 4.44 - 4.48 PLN. Investors may look for opportunities mostly among risky currencies depreciated in October, such as the Norwegian krone, the Australian dollar, the New Zealand dollar or the Canadian dollar. Among the representatives of a basket of emerging economies, the first choice may be the troubled Asian currencies or, characterised by positive real interest rates - and thus high interest rate attractiveness - the Latin American currencies, with a particular focus on the Mexican peso.