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Dollar Traders Will Interpret NFPs for QE3 Outlook

By , Chief Currency Strategist
05 April 2013 05:00 GMT
  • Dollar Traders Will Interpret NFPs for QE3 Outlook
  • Japanese Yen Collapses after BoJ Pulls Out All Stimulus Stops
  • British Pound Rebound after BoE Foregoes Stimulus Peculiarly Mild
  • Euro Recovers from Troubled ECB Forecast with Look to Balance Sheet
  • Canadian Dollar Advances Ahead of Volatility-Inducing Jobs Data
  • New Zealand Dollar: Inflation Linked Bond Sales Shows Strong Demand
  • Gold Plunge Tempers after BoJ Upgrade, Fed Stimulus Critical

Range Trade Strategies work best in quiet market conditions - such as the Asia trading session

Dollar Traders Will Interpret NFPs for QE3 Outlook

While the USDJPY’s incredible 3.4 percent rally stands a strong sign of the dollar’s inherent value against a fellow ‘safe haven’ currency, the benchmark currency was notably weaker against the balance of the liquid FX market. However, greenback weakness for pairs like EURUSD and GBPUSD are more reflections of hesitance ahead of another wave of serious event risk rather than a sign of weakness. The real market-moving potential for the dollar and possibly systemic risk interestscomes in the upcoming session’s nonfarm payrolls (NFP).

Through the past session, the equally-weighted Dow Jones FXCM Dollar Index (ticker = USDollar) was heavily skewed by its pairing with the freshly-deflation Japanese yen. Given the extreme move from USDJPY (the biggest daily rally since October 28, 2008), the Index managed a 0.5 percent advance of its own and unofficially ended the bearish leg that pulled the benchmark from its two-and-a-half year high set back in early March. The fundamental significance of the Fed’s largest counterparts updating their stimulus efforts is certainly a serious consideration for the dollar itself. The level of stimulus in a system has a direct association to the value of an individual currency. Therefore, the Bank of Japan’s (BoJ) and European Central Bank’s (ECB) reflections on further easing implicitly leverages the appeal of the dollar. And, the maturity of that endeavor matters just as much as – if not more than – the magnitude of the program. That ‘newness’ is a consideration that can see the euro or yen weighed more heavily than the dollar even if their programs are notionally smaller.

When it comes to monetary policy programs, the Fed’s effort is still the largest and arguably most influential on a global basis. It is that assertion that pegs the upcoming US employment report as the most important economic report this week. Rather than the FOMC’s actual monetary policy event where the group is prone to use boiler plate language and reiterate its commitments, the speculative ranks can garner a far better appraisal of the Fed’s time table for curbing and eventually reversing its Quantitive Easing (QE) efforts through the upcoming jobs numbers. The NFPs figure is for surface volatility. The deep cut is the level of unemployment. The Fed has said it will keep its accommodative stance until the jobless rate reaches 6.5 percent. Yet, interpreting ‘Fed-speak’, we can see the end of the monthly stimulus programs well before we reach that level. Even regular policy dove John Williams suggested the current pace could see stimulus taper by the summer.

Japanese Yen Collapses after BoJ Pulls Out All Stimulus Stops

Considering the yen plunged between 3.3 and 4.3 percent against all of its liquid counterparts this past session, it is safe to say that the Bank of Japan’s stimulus upgrade at least met the market’s already aggressive expectations. But, did the group’s policy jump move far enough to extend its already 25 percent tumble? Looking at the details, the BoJ announced its intention to double the nation’s money supply and will immediately adopt a ¥7 trillion-per-month ($74 billion) bond purchase program. Furthermore, the group will look to buy longer-dated government bonds, will drop a bank note rule and buy more ETFs and REITs. Notionally, this program is smaller than the Fed’s effort; but as a scale of increase or relative to GDP, it is larger. There is no doubting that the scope of this effort is impressive. However, there is a disturbingly easy way it can fall apart on the BoJ – risk aversion. If equities and other richly-priced assets falter, the low yield of yen carry pairs will suffer.

British Pound Rebound after BoE Foregoes Stimulus Peculiarly Mild

It seems the government’s remit – allowing the Bank of England (BoE) to pursue easing to support growth at the expense of inflation – did little to actually sway the country’s monetary policy group from their neutral bearing. The BoE ended its policy meeting Thursday exactly as it has numerous months before – with no change or guidance on the future. That 1,300-pip drop from GBPUSD is looking far more suspect. And yet, despite a mum MPC and market-wide advance for the pound, the cable has so far held 1.5250. It is likely that the majority at the BoE eventually shifts to a dovish regime; but even then, there seems little interest to compete on the scale of the Fed or BoJ.

Euro Recovers from Troubled ECB Forecast with Look to Balance SheetAs expected, the ECB stuck to its guns. The contrast of a central bank on hold – and actually shrinking its balance sheet through LTRO repayments – was prominent enough to drive the euro higher this past session. However, moving forward, there is room for bearishness through monetary policy. In ECB President Draghi’s comments, there was a clear downgrade in growth forecasts and activity concerns. Moreover, we are hearing about debate on rate cuts and new stimulus. Given the euro’s strength on the wind down, there can be weight to this discussion.

Canadian Dollar Advances Ahead of Volatility-Inducing Jobs Data

Everyone is focused on the US employment data – and for good reason. If the American labor report improve materially, the positive trade implications for Canada will be offset by the likely risk aversion move on QE3 withdrawal. That is a consideration through the medium-term. Short-term, we should look at the potential volatility through the Canadian jobs figures. This series has stirred a lot of action over the months.

New Zealand Dollar: Inflation Linked Bond Sales Shows Strong Demand

The New Zealand dollar’s performance this past session was mixed. A titanic rally against the Japanese yen makes sense for the stimulus factor, yet the presumed positive implications for traditional risk makes the slide versus the pound and euro unusual. We should keep sight of the kiwi’s investment appeal. On that front, an inflation-linked bond sale of 2025 bonds drew demand of 3.8 times the NZ$200 million offered.

Gold Plunge Tempers after BoJ Upgrade, Fed Stimulus Critical

Though gold rounded out a third consecutive daily decline through Thursday’s close, an intraday rebound prevented a far-more-material 1.1 percent plunge. The CBOE Gold Volatility Index is now at a five week high, trading volume on futures and ETFs has picked up, and fund holdings have extended the tumble to seven-month lows. However, the fundamentals matter. The BoJ has upped its game, the BoE is seen moving later and even the ECB may join. But it all rides on the Fed. If QE3 is seen ending after NFPs, the dollar will hammer gold.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

GBP

New Car Registrations (YoY)

7.90%

5:00

JPY

Coincident Index

91.9

91.6

Preliminary reading increased while current condition retreated; Future optimism could level off if impact of stimulus does not alter the deflationry expectation.

5:00

JPY

Leading Index

97.3

95

7:00

CHF

Foreign Currency Reserves

427.0B

430.0B

Used by SNB to help defend the EUR/CHF floor at 1.200.

8:00

EUR

Italian Deficit to GDP (YTD)

3.70%

Typically peak in March; Previous peaks show 4 year downtrend.

9:00

EUR

Euro-Zone Retail Sales (MoM)

-0.40%

1.20%

Contraction in eurozone service PMI signals weakness in retail sec.

9:00

EUR

Euro-Zone Retail Sales (YoY)

-1.20%

-1.30%

10:00

EUR

German Factory Orders s.a. (MoM)

1.10%

-2.50%

Conusmer goods fell by the most (MoM) in Jan from +2.6% to -0.3%; Uncertainties in Cyprus could curb domestic demand further.

10:00

EUR

German Factory Orders n.s.a. (YoY)

-1.50%

-2.50%

12:30

CAD

International Merchandise Trade (Canadian dollar)

0.10B

-0.24B

Sequestration budget cuts may weaken demand from US.

12:30

CAD

Unemployment Rate

7.0%

7.0%

Stayed at 7.00 for 2M, following a 3M downtrend since 10/2012.

12:30

CAD

Net Change in Employment

5.0K

50.7K

Construction and government jobs accounts for 1/3 of new jobs. Weak investment and exports headwind.

12:30

CAD

Full Time Employment Change

33.6

12:30

CAD

Part Time Employment Change

17.2

1Y Avg. 2.16; high 43.2; Low -39.3

12:30

CAD

Participation Rate

66.7

66.7

1Y Avg. 66.72; high 66.80; Low 66

12:30

USD

Change in Non-farm Payrolls

199K

236K

Markets look for impact of sequester, especially in government jobs sector;

12:30

USD

Unemployment Rate (MAR)

7.7%

7.7%

12:30

USD

Change in Private Payrolls

203K

246K

12:30

USD

Change in Household Employment

170

1Y Avg. 134; high 810; Low -198

12:30

USD

Underemployment Rate (U6)

14.3%

Currently at 4 year low, sharp fall due to lower participating rate.

12:30

USD

Trade Balance

-$44.6B

-$44.4B

As new drilling techniques remain expensive, demand for oil and petroleum will remain strong and may widen the trade deficit.

GMT

Currency

Upcoming Events & Speeches

5:00

JPY

Bank of Japan's Monthly Economic Report for April (Table)

8:00

GBP

BoE’s Dale Speaks in London

8:30

GBP

BoE’s FPC Publishes Record of Capital Shortfall Report

11:00

EUR

Bank of Spain Member Speaks on Spain GDP

11:00

EUR

ECB Reports Weekly 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

15.0000

2.0000

9.8365

7.8165

1.3650

Resist 2

7.5800

5.8950

6.1150

Resist 1

12.9000

1.9000

9.5500

7.8075

1.3250

Resist 1

6.8155

5.8300

5.8620

Spot

12.3159

1.8037

9.1870

7.7629

1.2401

Spot

6.5318

5.7679

5.7863

Support 1

12.2385

1.6500

8.7750

7.7490

1.2000

Support 1

6.0800

5.6075

5.5000

Support 2

11.5200

1.5725

8.5650

7.7450

1.1800

Support 2

5.8085

5.4440

5.3040

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist. 3

1.3037

1.5338

98.25

0.9484

1.0196

1.0483

0.8472

127.19

149.44

Resist. 2

1.3009

1.5310

97.94

0.9464

1.0180

1.0463

0.8453

126.73

149.00

Resist. 1

1.2981

1.5281

97.63

0.9445

1.0164

1.0444

0.8433

126.28

148.56

Spot

1.2924

1.5224

97.01

0.9406

1.0133

1.0406

0.8395

125.37

147.69

Support 1

1.2867

1.5167

96.39

0.9367

1.0102

1.0368

0.8357

124.46

146.82

Support 2

1.2839

1.5138

96.08

0.9348

1.0086

1.0349

0.8337

124.01

146.38

Support 3

1.2811

1.5110

95.77

0.9328

1.0070

1.0329

0.8318

123.55

145.94

v

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

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

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05 April 2013 05:00 GMT