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Forex pairs in this Article » USD, GOLD, EUR/USD, USD/JPY, GBP/USD, AUD/USD
Talking Points:

  • Dollar: Can the NFPs Salvage a Tentative Breakdown?
  • Euro Rallies After the ECB Holds Monetary Policy Unchanged
  • British Pound Steady Through BoE Decision, Bigger Moves Ahead
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.

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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

5:00

JPY

Leading Index (DEC P)

111.9

111.1

The last Leading Index print was the best since 2007.

5:00

JPY

Coincident Index (DEC P)

111.4

110.7

7:00

EUR

German Trade Balance (euros) (DEC)

17.3B

18.1B

German imports saw a downward revision for November from -1.1% to -2.3%.

7:00

EUR

German Current Account (euros) (DEC)

20.8B

21.6B

7:00

EUR

German Exports s.a. (MoM) (DEC)

0.8%

0.3%

7:00

EUR

German Imports s.a. (MoM) (DEC)

0.9%

-2.3%

8:00

CHF

Foreign Currency Reserves (JAN)

435.8B

435.2B

The figure has been relatively flat since the 2012 jump in EUR/CHF off the 1.20 floor.

8:15

CHF

Retail Sales (Real) (YoY) (DEC)

4.2%

Prior print was the highest since early 2013.

9:30

GBP

Visible Trade Balance (Pounds) (DEC)

-9.300B

-9.439B

Industrial Production YoY figures hit 2.5 year highs over the past few months, but strong data continues to have less of an impact on GBP strength after its huge run.

9:30

GBP

Trade Balance Non EU (Pounds) (DEC)

-3.100B

-3.023B

9:30

GBP

Total Trade Balance (Pounds) (DEC)

-3.000B

-3.238B

9:30

GBP

Industrial Production (MoM) (DEC)

0.6%

0.0%

9:30

GBP

Industrial Production (YoY) (DEC)

2.3%

2.5%

9:30

GBP

Manufacturing Production (MoM) (DEC)

0.6%

0.0%

9:30

GBP

Manufacturing Production (YoY) (DEC)

2.3%

2.8%

11:00

EUR

German Industrial Production s.a. (MoM) (DEC)

0.3%

1.9%

Although key data for insight into Germany, we are likely to see EUR volatility remain light ahead of NFPs.

11:00

EUR

German Industrial Production n.s.a. and w.d.a. (YoY) (DEC)

3.5%

3.5%

13:30

CAD

Net Change in Employment (JAN)

-45.9K

Data out of Canada remains some of the worst among the majors as of late. Trade Balance figures yesterday came in far below expectations. We will need to see a serious upward revision if we are to get any CAD strength; an unlikely prospect.

13:30

CAD

Unemployment Rate (JAN)

7.2%

13:30

CAD

Full Time Employment Change (JAN)

-60

13:30

CAD

Part Time Employment Change (JAN)

14.2

13:30

CAD

Participation Rate (JAN)

66.4

13:30

USD

Change in Non-Farm Payrolls (JAN)

185K

74K

Market participants will be looking for an upward revision in last month’s 74K figure as well as a strong print here if USD strength is to hold, especially against the Yen.

13:30

USD

Unemployment Rate (JAN)

6.7%

6.7%

13:30

USD

Labor Force Participation Rate (JAN)

62.8%

13:30

USD

Underemployment Rate (JAN)

13.1%

13:30

USD

Change in Private Payrolls (JAN)

190K

87K

13:30

USD

Change in Manufacturing Payrolls (JAN)

10K

9K

13:30

USD

Two-Month Payroll Net Revision (JAN)

143K

13:30

USD

Change in Household Employment (JAN)

143

13:30

USD

Average Hourly Earnings (MoM) (JAN)

0.2%

0.1%

13:30

USD

Average Hourly Earnings (YoY) (JAN)

1.8%

13:30

USD

Average Weekly Hours (JAN)

34.4

34.4

20:00

USD

Consumer Credit (DEC)

$12.550B

$12.318B

Figure has slowed since October.

GMT

Currency

Upcoming Events & Speeches

0:30

AUD

Reserve Bank of Australia Statement on Monetary Policy

1:45

CNY

HSBC/Markit Purchasing Manager Index Services (JAN)

10:45

EUR

ECB's Ewald Nowotny Speaks on Euro Economy

11:00

EUR

ECB's Georgios Provopoulos Speaks on Euro Economy

11:00

EUR

European Central Bank Announces 3-Year LTRO Repayment

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

v



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