Dollar: Can the NFPs Salvage a Tentative Breakdown?

Dollar: Can the NFPs Salvage a Tentative Breakdown?

Having loitered at a multi-month level of support, the Dow Jones FXCM Dollar (ticker = USDollar) finally made a conspicuous, bearish break this past session. That is a troubling move ahead of Friday’s closely-watched January NFPs release. Where the scenarios for the labor report in previous months may have leaned in favor of a bullish interpretation for the greenback – as it would weigh on the speculation of the eventual Taper – we have seen the market’s interest in the Fed’s QE wind-down fade since they made their first definitive move back on December 18. This is not to mean that this important policy shift is not important to the dollar and global capital markets, but it does imply a higher threshold for encouraging the benchmark currency to substantial short-term gains.

Now engaged in the very early stages of a ‘tightening’ phase (trimming the growth of the balance sheet rather than shrinking it), the Fed’s policy path is a heavy contrast to many of its largest counterparts. Beyond the general assessment of a currency that is not engaging in the relative monetary policy scuffle (a polite term for ‘currency war’), the bullish implications of a differing policy view shape rate forecasts and influence market-based yields. Consequently, overnight index swaps are pricing in 31 bps worth of expected tightening from the central bank by next February – the most hawkish the market has been since April 2011. While these may seem distant views, yields are critical to pricing currencies and its speculation begins very early – the British pound is certainly testament to that.

Yet, despite the change in a five-year trend of steadily escalating stimulus from the US policy authority, the market either considers the advantage too modest or is otherwise too distracted to base its bearings on the consideration. That can create trouble for the dollar with the release of the upcoming payrolls. Though the data is unlikely to change the $10 billion Taper pace that is now considered the ‘default’, it can leverage the S&P 500’s recent bounce and undermine the greenback’s nascent safe haven appeal. This sentiment role is the crux of the currency’s possible reaction to the data. The ideal outcome for the data would be an improvement in the labor statistics (an unemployment downtick is more influential than NFP beat) that still sees equities and risk assets drop. Though, ideal scenarios are low probability.

Euro Rallies After the ECB Holds Monetary Policy Unchanged

Policy officials with the European Central Bank (ECB) deferred action to preempt possible economic or financial trouble down the line – and subsequently sparked notable euro rally. Consistent with the majority of economists (62 of 66 that participated), the policy group decided to keep policy unchanged. That would translate into a hold on the benchmark and deposit rates (0.25 and 0.00 percent respectively) as well as a rejection of fresh unorthodox stimulus programs. Undercurrent conditions, the assumption of ‘need’ for more support seems relatively light. While regional inflation pressures are at Euro-era record lows and a number of member economies are still struggling with recessions, ECB President Draghi and crew are stimulus-wary. However, the potential for financial issues developing out of economic or global troubles is still high. If yields rise too quickly, economic activity drop or market volatility surges, the ECB will likely act. But will they head it off or react?

British Pound Steady Through BoE Decision, Bigger Moves Ahead

As expected, there were few surprises from the Bank of England rate decision this past session. Without a change in course for monetary policy, there was no reason to offer extraordinary updates to the market. What makes the sterling particularly resilient in the near-term though is the knowledge that more a very important change is coming next week. The BoE’s Quarterly Inflation report next Wednesday offers the central bank its opportunity to update its forward guidance. Attaching a 7.0 percent target for the UK jobless rate has proven a disaster for the bank’s credibility as the market has priced in a 2014 hike despite the bank’s adamant 2015 stance. Watch for trade and factory data Friday.

Yen Crosses Rise on Risk, BoJ Official’s Stimulus Threat

Global equities were on average in the green by more than 1.0 percent this past session. Furthermore, volatility measures dropped sharply (the VIX dropped 2.7 vols to 17.2 percent), denoting a sharp taming of fear. With risk aversion that destabilizes the steady long yen-cross trade easing, the market is willing to front-run the BoJ – though not necessarily feed the tepid carry.

Canadian Dollar Looks to Strong Arm USDCAD Reversal on Jobs Data

Taking advantage of the US dollar’s recent weakness, USDCAD is working on a reversal from its multi-year peak set last week. The Canadian dollar will take some of the responsibility for this move into its own hands this upcoming session with the release of local employment figures. In contrast to the massive 45,900-net jobless reported in December, the forecast is for a 20,000-net increase for January figures.

Australian Dollar Unable to Maintain Advance After RBA Report

The 12-month interest rate forecast for the RBA priced through swaps is at a two-month high 18 bps; and the Australian 2-year notes yield has surged 9.3 percent from this week’s low to 2.83 percent. The rate outlook is improving. So then why is the Aussie dollar sliding this morning. The RBA Monetary Policy report upgraded growth and inflation forecasts – but the outlook was heavily contingent on a further weakening A dollar.

Emerging Markets Capital Finally Rebound Alongside Currencies

The majority of the Emerging Market currency world posted gains against the safe haven dollar this past session, but the real improvement comes via the group’s capital markets. The MSCI Emerging Market ETF cleared 38.00 Thursday for the first meaningful move higher since early January. The persistence of this move depends heavily on a continued deflation of volatility pressure in broader financial markets.

Gold’s NFP Potential Skewed to the Bearish

Running through the same NFP scenarios we would consider for the dollar, there is significantly less scope for gold to gain traction. A risk bounce and acclimation to Taper by the equities market significantly curbs the extreme safe haven appeal that the metal has already struggled to portray. Alternatively, a weak data showing is unlikely to stall the Taper outlook. Gold’s best bet is simply for a dollar tumble Friday.

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ECONOMIC DATA

GMT	Currency	Release	Survey	Previous	Comments
6:00	JPY	Machine Tool Orders (YoY) (JAN P)		28.1%	These are levels not seen since 2011.
7:45	EUR	French Current Account (euros) (DEC)		-1.9B	Positive figure only twice since 2004.
8:15	CHF	Consumer Price Index (MoM) (JAN)	-0.3%	-0.2%	CHF strength continues in the wake of uncertainty despite deflationary price level environments.
8:15	CHF	Consumer Price Index (YoY) (JAN)	0.1%	0.1%
8:15	CHF	Consumer Price Index- EU Harmonized (MoM) (JAN)	-0.3%	0.2%
8:15	CHF	Consumer Price Index- EU Harmonized (YoY) (JAN)	0.4%	0.3%
10:00	EUR	Euro-Zone Industrial Production s.a. (MoM) (DEC)	-0.3%	1.8%	November’s MoM figures was the best since 2010.
10:00	EUR	Euro-Zone Industrial Production w.d.a. (YoY) (DEC)	1.8%	3.0%
12:00	USD	MBA Mortgage Applications (FEB 7)		0.4%	We may see further consolidation ahead of Yellen on Thursday.
19:00	USD	Monthly Budget Statement (JAN)	-$28.5B	53.2B
21:30	NZD	Business NZ Performance of Manufacturing Index (JAN)		56.4	July saw the highest reading since 2004.
23:50	JPY	Domestic Corporate Goods Price Index (MoM) (JAN)	0.1%	0.3%	Despite a strong rise since the -2% lows in 2012, we are seeing the YoY figure flatten as of late.
23:50	JPY	Domestic Corporate Goods Price Index (YoY) (JAN)	2.4%	2.5%

GMT	Currency	Upcoming Events & Speeches
1:00	USD	Fed's Jeffrey Lacker Speaks on Financial Stability
1:10	USD	Fed's Richard Fisher Speaks on U.S. Economy
10:00	EUR	German Economy Ministry Half-Year Economic Forecasts
10:30	GBP	Bank of England Inflation Report
11:15	EUR	ECB's Peter Praet Speaks on Euro Economy
13:45	USD	Fed's James Bullard Speaks on Monetary Policy
15:30	EUR	ECB President Mario Draghi Speaks on Euro Economy

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT							SCANDIES CURRENCIES 18:00 GMT
Currency	USD/MXN	USD/TRY	USD/ZAR	USD/HKD	USD/SGD		Currency	USD/SEK	USD/DKK	USD/NOK
Resist 2	14.0200	2.3800	12.7000	7.8165	1.3650		Resist 2	7.5800	5.8950	6.5135
Resist 1	13.5800	2.3000	11.8750	7.8075	1.3250		Resist 1	6.8155	5.8475	6.2660
Spot	13.2591	2.2389	11.1152	7.7601	1.2682		Spot	6.5258	5.5146	6.2307
Support 1	13.0000	2.1000	10.2500	7.7490	1.2000		Support 1	6.0800	5.3350	5.7450
Support 2	12.6000	1.7500	9.3700	7.7450	1.1800		Support 2	5.8085	5.2715	5.5655

INTRA-DAY PROBABILITY BANDS 18:00 GMT

CCY	EUR/USD	GBP/USD	USD/JPY	USD/CHF	USD/CAD	AUD/USD	NZD/USD	EUR/JPY	Gold
Res 3	1.3633	1.6432	102.43	0.9123	1.1164	0.9059	0.8336	138.74	1282.49
Res 2	1.3608	1.6402	102.16	0.9103	1.1141	0.9035	0.8312	138.35	1276.39
Res 1	1.3582	1.6371	101.89	0.9082	1.1119	0.9012	0.8289	137.95	1270.30
Spot	1.3532	1.6311	101.36	0.9041	1.1073	0.8965	0.8242	137.16	1258.10
Supp 1	1.3482	1.6251	100.83	0.9000	1.1027	0.8918	0.8195	136.37	1245.90
Supp 2	1.3456	1.6220	100.56	0.8979	1.1005	0.8895	0.8172	135.97	1239.81
Supp 3	1.3431	1.6190	100.29	0.8959	1.0982	0.8871	0.8148	135.58	1233.71

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--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

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