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Dollar and S&P 500 Poised for NFP-Driven Volatility

By , Chief Currency Strategist
04 April 2014 05:10 GMT

Talking Points:

  • Dollar and S&P 500 Poised for NFP-Driven Volatility
  • Euro Slides Despite ECB Hold on Rates, Stimulus
  • Japanese Yen Pairs Rally Over-Extended Ahead of BoJ

Dollar and S&P 500 Poised for NFP-Driven Volatility

It doesn’t take more than a glance at the charts to see there is serious tension in the markets. On the one hand, the Dow Jones FXCM Dollar Index (ticker = USDollar) is at the top of a two-month range. On the other, the S&P 500’s arc to record high has tapered off steadily from its aggressive drive through the opening two days of the week. For the traditional risk-reward scale, that means we have both the FX market’s preferred safe haven at the top of its recent trading band while the banner man for broader capital market’s speculative stands at a record high. While the greenback has slackened its tether to risk trends, this positioning nevertheless reflects an overextended market. And, all that is needed to trigger a sharp rebalancing is the proper catalyst. Can the NFPs be that spark?

Nowadays, the monthly US labor data is more of a media event than a trader affair. Between a consensus US growth forecast that put it at the head of the developed world curve and the Federal Reserve’s decree that Tapering will continue barring a ‘significant’ change in underlying conditions, the outlook seems steady for the currency. Yet, when we couple speculative bearing with the distinct ‘good or bad’ assessments that are made on this data, there is clear potential. The most potent scenario here would be one where risk aversion is set off. Given the lack of conviction and extreme levels of exposure, capitulation could set send equities and yen crosses careening.

The ideal catalyst for a dollar-favorable move would be a downtick in unemployment (it’s expected to ease to 6.6 percent) and/or material enough beat for NFPs (consensus is 200,000) to spur expectations of a forward shift in rate forecasts. The problem is, that would be difficult to accomplish. Alternatively, a substantive miss could shake growth convictions in the capital markets, but it could also complicate the dollar’s participation as weakened labor conditions could – if not threaten the steady Taper – push back the Fed’s first hike. In an alternative view for risk appetite, a strong reading could also reinforce equity highs – though the greenback response to this is unlikely to be one-for-one.

See more on John's scenarios and strategy for the upcoming NFPs in Today's Strategy Video

Euro Slides Despite ECB Hold on Rates, Stimulus

As the majority of market participants and economists had predicted, the European Central Bank (ECB) held its hand on monetary policy this past session. Both groups were attributing more than a 95 percent probability that the policy authority would decide for the fifth consecutive meeting to hold its benchmark lending rate at 0.25 percent and avoid adopting any new unorthodox measures. They were right. And yet, the euro still fell. Meeting the status quo on this month’s efforts would mean shift the focus forward and assessing whether further accommodation would be adopted at future meetings. In ECB President Draghi’s press conference, there was a notable increase in the dovish rhetoric. Though there is still ambiguity to it, the central banker suggested they were ready to move if inflation remained too low for too long. Moreover, they were “unanimous” in favoring unconventional methods and even discussed QE.

Japanese Yen Pairs Rally Over-Extended Ahead of BoJ

While global equities look top heavy, the yen crosses look especially exaggerated. In the past week, these pairs have surged between 1.2 (CHFJPY) and 2.5 percent (CADJPY). The consistency of this move has been equally impressive and concerning. USDJPY has advanced six consecutive sessions through Thursday – the longest run since November 2012 – while pairs like CADJPY and AUDJPY have driven an astounding 10-day plus ramp. Price alone makes the case of a dangerous market, but fundamentals no doubt add to this mix as well. Despite a tax hike initiated this week and concerns of its economic repercussions, the Bank of Japan (BoJ) is expected to decline a QE upgrade at its meeting next week. Until this year, the markets were almost certain of an upgrade. Polls still show heavy belief of a move by July.

Canadian Dollar May See More Action than USD on Jobs Figures

Where there is considerable debate and analysis that will go into the US jobs data, the market’s reactionto the Canadian figures is likely to be straightforward. A better-than-expected reading is more likely to spur a rally while a disappointing print will send the currency sliding. The consensus is for the jobless rate to remain unchanged at 7.0 percent and net payrolls to rise by 22,500. Even if we ‘meet’ expectations, pairs like USDCAD and CADJPY are likely to still generate a breakout as they have simply run out of room and have entries and stops on both sides.

British Pound: What Will the BoE Do to Guide Rate Expectations?

We have seen conviction in UK rate forecasts ebb this week – but not materially. The market is looking for something definitive that would undermine their robust expectations for the BoE to make its first tightening move around March 2015. We have a bank rate decision scheduled next Thursday, but the market is already writing off its impact. With no change comes no guidance.

Australian Dollar Stalled Run Finds Yields Drop, Jobs Data Ahead

Australian bond yields dropped both at the front and back end of the curve this past session. The retreat weighs the return appeal that the carry so desperately needs to rebuild its international cache. Then again, yields move inverse to bond prices – meaning we are likely seeing capital inflow. Next week, we have jobs, inflation expectations and confidence figures on tap. The week after: Chinese 1Q GDP.

Emerging Markets: Finally A Bearish Close

After an incredible 10-day rally – only two of moves of that magnitude having been recorded – the MSCI Emerging Market ETF finally posted a bearish close Thursday. The slip was a mild one however it did come on elevated volume. Risk trends moving forward are key for this grouping of high-return currencies. Next week, watch out for the South Korean and Indonesian central bank rate decisions.

Gold Bulls Look for a Deferred Yield Outlook and Dollar Tumble

Quickly dashing the hopes of early momentum building, gold closed 0.2 percent down this past session. For a bullish recovery, the metal needs a definitive catalyst as speculators are unlikely to see a ‘bargain’ call with loose capital again so soon. Looking for a spark, a dollar drop can act as a very big lever for the alternative-to-fiat asset. Risk aversion could encourage a jump, but it is unlikely to carry as much weight here. **Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

7:30

EUR

Markit Germany PMI Construction (MAR)

53.6

Euro selling has been strong following Draghi’s comments on Thursday at the ECB Rate Decision. Any misses in data figures out of the Eurozone’s strongest economy could provide a catalyst for further selling. Nevertheless, with NFPs later in the day the follow through here on price action may be limited.

8:10

EUR

Markit German PMI Retail (MAR)

52.1

8:10

EUR

Markit Euro-Zone PMI Retail (MAR)

--

10:00

EUR

German Factory Orders s.a. (MoM) (FEB)

0.3%

1.2%

10:00

EUR

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

6.7%

8.4%

12:30

CAD

Net Change in Employment (MAR)

25.0K

-7.0K

Note that a divergence between the CAD and USD employment data can lead to exaggerated moves in the USD/CAD pair.

12:30

CAD

Unemployment Rate (MAR)

7.0%

7.0%

12:30

CAD

Full Time Employment Change (MAR)

18.9

12:30

CAD

Part Time Employment Change (MAR)

-25.9

12:30

CAD

Participation Rate (MAR)

66.2

12:30

USD

Change in Non-farm Payrolls (MAR)

190K

175K

Although we saw ADPs slightly miss on Wednesday, the print remained relatively strong and the prior figure was revised upwards. Still, as the USDollar attempts to make a concerted low, this NFP figure will be critical and volatility is to be expected. Remember that price action in USDJPY tends to be quite choppy before a trend follows through.

12:30

USD

Unemployment Rate (MAR)

6.6%

6.7%

12:30

USD

Labor Force Participation Rate (MAR)

63.0%

12:30

USD

Change in Private Payrolls (MAR)

191K

162K

12:30

USD

Change in Manufacturing Payrolls (MAR)

5K

6K

12:30

USD

Two-Month Payroll Net Revision (MAR)

--

12:30

USD

Change in Household Employment (MAR)

42

12:30

USD

Underemployment Rate (MAR)

12.6%

12:30

USD

Average Weekly Hours (MAR)

34.4

34.2

14:00

CAD

Ivey Purchasing Managers Index s.a. (MAR)

57.2

GMT

Currency

Upcoming Events & Speeches

10:00

EUR

ECB Publishes 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

13.0576

2.1867

10.5850

7.7578

1.2610

Spot

6.4765

5.4320

5.9991

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

1.3845

1.6728

103.09

0.8940

1.1090

0.9378

0.8778

141.82

1318.08

Res 2

1.3820

1.6701

102.86

0.8922

1.1069

0.9356

0.8756

141.47

1312.11

Res 1

1.3795

1.6673

102.62

0.8904

1.1049

0.9334

0.8735

141.12

1306.15

Spot

1.3745

1.6619

102.16

0.8867

1.1007

0.9290

0.8693

140.42

1294.23

Supp 1

1.3695

1.6565

101.70

0.8830

1.0965

0.9246

0.8651

139.72

1282.31

Supp 2

1.3670

1.6537

101.46

0.8812

1.0945

0.9224

0.8630

139.37

1276.35

Supp 3

1.3645

1.6510

101.23

0.8794

1.0924

0.9202

0.8608

139.02

1270.38

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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The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. Forex Capital Markets, L.L.C.® assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. Forex Capital Markets, L.L.C.® does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. Forex Capital Markets, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not indicative of future results.

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04 April 2014 05:10 GMT