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Forex: Dollar Suffers Critical Break Ahead of Confusing NFPs

By , Chief Currency Strategist
07 March 2014 05:29 GMT

Talking Points:

  • Dollar Suffers Critical Break Ahead of Confusing NFPs
  • Euro Rally – How Far Can it Go on ‘No Change’
  • Yen Crosses Finally Charge Higher but Still Trailing S&P 500

Dollar Suffers Critical Break Ahead of Confusing NFPs

Whether dollar traders’ focus rests with the currency’s risk bearings or relative monetary policy, their faith has been tested. Through this past session, EURUSD closed above 1.3850 for the first time in more than two years while the Dow Jones FXCM Dollar Index (ticker = USDollar) slipped below trendline support that has been in place since September 2012. Sentiment behind the greenback is raw, even though its fundamental cues are still a mixed bag. For a definitive driver for the benchmark’s slide this week, the positive lean on risk trends – which has lifted equities as well as FX-based carry – would be a reasonable connection. However, the dubious conviction behind the speculative build up (some say chasing yield) and the dollar’s lax correlation to the underlying current suggests this isn’t an engaged driver moving forward.

Far more influential over the listing currency is the strength of its counterparts. The Euro, Australian and New Zealand dollars in particular have leveraged impressive strength through Thursday’s session against most other counterparts. A joint appetite for carry currencies and the world’s second most liquid fiat positions the dollar in a difficult position as it struggles for momentum of its own. That said, if the greenback’s weightiest fundamental issues are cross winds, its tumble is likely to end rather quickly. An ECB rate hold does not leverage a definitive advantage for the euro over the dollar. As for carry appetite, risk trends in most forms are second guessed every step of the way. Yet, another spark may offer the dollar a more durable momentum: the February labor data.

Market reaction to the monthly employment stats is already a game in confusion, but this release promises to be a particular brand of disorder. There are many considerations to account for in this event. Recently, we’ve heard a number of Fed officials preempt the release’s implications for the central bank’s Taper policy as weather-related issues would likely cause temporary distortions. A ‘Taper-is-the-pace-absent-a-systemic-change’ seems the mantra for nearly every one of the policy officials. That being the case, disappointing data would weigh on growth and risk bearings rather than stimulus and rate forecasts. Alternatively, robust employment data ensures the steady $10 billion reductions in QE and may even add weight to an argument to accelerate. What optimism would be found in the implications this holds for economic activity, the capital market influence would likely be capped rather quickly. Watch for the short-term, media-driven market response. Then look for the trend.

Euro Rally – How Far Can it Go on ‘No Change’

The Euro climbed against all of its major counterparts with the exception of the Australian dollar this past session. The catalyst for the jump was straightforward: the ECB’s decision to forgo an upgrade in its stimulus program would necessitate a reversal in the discount applied to the currency on the chance that a new wave of support would have been realized. Heading into the meeting, the consensus amongst economists established an approximate 25 percent probability that a rate hike would be announced. Though speculative interests were not directly in line with those assumptions, they weren’t likely far off. Subsequently, a hold necessitated short covering. The question is how much drive a ‘no change’ outcome can muster. With an uptick in the 2014 GDP forecast (to 1.1 percent) and downtick in its CPI view (to 1.0 percent), there is still plenty of room for ‘negative risks’ to spur the ECB into action. Ultimately, this is a passive action, so traders will seek out more.

Yen Crosses Finally Charge Higher but Still Trailing S&P 500

The yen crosses soared Thursday with the funding currency dropping between 0.8 percent (USDJPY) and 1.9 percent (AUDJPY) against its major counterparts. This was certainly a ‘risk on’ reflection. Though global equities offered limited moral support, the Deutsche Bank Carry Harvest Index surged to a near four-month high while emerging markets heaved higher. Appetite for yield is a powerful catalyst for the yen pairings, and there is room to close with more stretched benchmarks like the S&P 500. Yet, it is still wise to watch the Nikkei 225 for guidance.

British Pound Bypasses BoE, Moves on to Inflation Forecast Update

As expected, the Bank of England (BoE) left its monetary policy objectives untouched at its policy meeting Thursday. Without an update, there would be no commentary for industrious speculators to ferret out forecasts. That said, the 10-year UK gilt yield (an important lead for the pound rate forecasts) did jump sharply Thursday. Perhaps today’s BoE/GfK inflation forecast report will offer more to work with.

New Zealand Dollar Positioning at Extraordinary Levels

Retail FX traders positioning is reflecting a staggering imbalance on NZDUSD exposure. For every one long trade amongst the speculative ranks, there are 19 shorts. There is evidence to suggest extremes in positioning correlate to extremes in price, but those excesses can build before folding. Next week, we have the RBNZ rate decision which is expected to deliver the groups firs hike in a projected two-year regime.

Canadian Dollar Closes Out Week with Jobs Data, Volatility?

Manufacturing activity growth in Canada unexpectedly accelerated last month according to the Ivey PMI survey. That’s a notable economic development, but it doesn’t carry the clout necessary to dislodge the loonie’s passive tracking of its US counterpart. The upcoming docket may find better success. February employment figures and January trade statistics are two key pieces of data.

Emerging Markets From Panic to Multi-Month Highs in a Week

At the beginning of the week, the emerging markets were returning to a sense of panic with the segment’s currencies tumbling versus the dollar and volatility soaring. How things have changed, as we now find USDZAR at two month lows while USDBRL is finding its own three-month trough. These currencies are sensitive to risk trends, but are not in the line of site for crisis (like Ukraine and Venezuela).

Gold Rallies Back to $1,350 but Doesn’t Progress Further

With a distinct tumble in the US dollar, gold would reap the benefits of a cheaper pricing instrument. The metal jumped 1 percent back to $1,350, but priced in euros or Australian dollars the progress was significantly mitigated. The gold drive we are seeing now is not the same from four years ago. This is not a need for fiat alternatives, rather it seems a bid for ‘cheap’ assets. Like most other assets, that requires steady risk.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

5:00

JPY

Leading Index (JAN P)

112.4

111.7

A 112.4 figure for Leading Index would be a six and a half year high.

5:00

JPY

Coincident Index (JAN P)

114.6

111.7

6:45

CHF

Unemployment Rate (FEB)

3.5%

3.5%

Foreign Currency Reserves from the SNB remains crucial, especially in the context of a low EUR/CHF rate. Following the Euro’s massive rally on Thursday, this will likely ease pressures.

6:45

CHF

Unemployment Rate s.a. (FEB)

3.2%

3.2%

8:00

CHF

Foreign Currency Reserves (FEB)

436.1B

437.7B

8:15

CHF

Consumer Price Index (MoM) (FEB)

0.2%

-0.3%

8:15

CHF

Consumer Price Index (YoY) (FEB)

0.0%

0.1%

8:15

CHF

Industrial Production (YoY) (4Q)

0.7%

9:30

GBP

BoE/GfK 12-Month Inflation Forecast (FEB)

3.6%

A higher figure here would likely benefit GBP crosses.

11:00

EUR

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

0.8%

-0.6%

November set a two year high for the YoY figure.

11:00

EUR

German Industrial Production (YoY) (JAN)

3.9%

2.6%

13:30

CAD

Net Change in Employment (FEB)

16.8K

29.4K

As we have seen thus far in 2014, USD/CAD price action continues to take the ‘whose data is worse’ mentality in regards to price action. If we are to see further USD/CAD weakness, we’ll have to see another round of relatively strong CAD data to complement recent US weakness.

13:30

CAD

Unemployment Rate (FEB)

7.0%

7.0%

13:30

CAD

Full Time Employment Change (FEB)

50.5

13:30

CAD

Part Time Employment Change (FEB)

-21.1

13:30

CAD

Participation Rate (FEB)

66.3

13:30

CAD

Labor Productivity (QoQ) (4Q)

0.6%

0.2%

13:30

CAD

International Merchandise Trade (C$) (JAN)

-1.70B

-1.66B

13:30

USD

Change in Non-Farm Payrolls (FEB)

149K

113K

Following disappointing ADP Employment Change Figures on Wednesday, many banks have lowered their NFP estimates. Private payroll estimates have been reduced from 155K last week to 150K currently.

13:30

USD

Unemployment Rate (FEB)

6.6%

6.6%

13:30

USD

Labor Force Participation Rate (FEB)

63.0%

13:30

USD

Change in Private Payrolls (FEB)

150K

142K

13:30

USD

Change in Manufacturing Payrolls (FEB)

4K

21K

13:30

USD

Two-Month Payroll Net Revision (FEB)

34K

13:30

USD

Underemployment Rate (FEB)

12.7%

13:30

USD

Change in Household Employment (FEB)

638

13:30

USD

Average Hourly Earnings (MoM) (FEB)

0.2%

0.2%

13:30

USD

Average Hourly Earnings (YoY) (FEB)

2.0%

1.9%

13:30

USD

Average Weekly Hours (FEB)

34.4

34.4

13:30

USD

Trade Balance (JAN)

-$39.0B

-$38.7B

20:00

USD

Consumer Credit (JAN)

$14.00B

$18.756B

December had the highest figure since early 2013.

GMT

Currency

Upcoming Events & Speeches

10:00

EUR

Bank of Italy Report on Balance-Sheet Aggregates

17:00

USD

Fed's William Dudley Speaks on U.S. Economy

17:30

USD

Former-Fed Chair Ben Bernanke Speaks on U.S. 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

13.2810

2.2066

10.7710

7.7608

1.2707

Spot

6.4490

5.4333

6.0130

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

1.3834

1.6783

103.08

0.8947

1.1164

0.9038

0.8466

141.76

1360.21

Res 2

1.3810

1.6754

102.84

0.8929

1.1144

0.9016

0.8446

141.39

1354.35

Res 1

1.3785

1.6726

102.61

0.8910

1.1124

0.8994

0.8425

141.02

1348.49

Spot

1.3735

1.6669

102.13

0.8873

1.1085

0.8950

0.8383

140.28

1336.77

Supp 1

1.3685

1.6612

101.65

0.8836

1.1046

0.8906

0.8341

139.54

1325.05

Supp 2

1.3660

1.6584

101.42

0.8817

1.1026

0.8884

0.8320

139.17

1319.19

Supp 3

1.3636

1.6555

101.18

0.8799

1.1006

0.8862

0.8300

138.80

1313.33

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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07 March 2014 05:29 GMT