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Dollar Weathers Mixed NFP Release with Low Liquidity, Ends the Week at a Critical Fork

Dollar Weathers Mixed NFP Release with Low Liquidity, Ends the Week at a Critical Fork

2010-07-02 23:30:00
John Kicklighter, Chief Currency Strategist
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Dollar Weathers Mixed NFP Release with Low Liquidity, Ends the Week at a Critical Fork
Following Thursday’s sharp decline for the US dollar (the biggest single-day decline for the Dollar Index since May 8th of last year), currency traders were torn with what to expect for Friday’s session. Momentum would have been theoretically easy to maintain given the 85.20 break from the Index and rally above 1.25 for EURUSD. On the other hand, we also had the draw of an extended holiday weekend for the United States. And, though the official market holiday extended to Monday rather than starting off the weekend, early onset sedation is nonetheless a common scenario in these specific circumstances. The deciding factor could have been the ever-influential nonfarm payrolls (NFP) release. Yet, indicator and preset drive wasn’t enough to keep the trend alive. For the greenback, the day’s performance was a tepid follow through on the previous session’s losses. Notably, EURUSD would hold above 1.25 at six-week highs while GBPUSD wouldn’t cross back below 1.5125 at its own two-month peak. Ultimately, investor sentiment would offer little support in determining bias and conviction for the safe-haven dollar. The Dow Jones Industrial Average fell for a seventh consecutive day; but there was very little energy in extending such an impressive run. Showing a similar measure of moderation, European government debt yields (highly sensitive to risk) eased somewhat while gold (one of investors’ favored safe haven) put in for a mild bounce.

What is interesting about the dollar’s performance, however, is that a period of stability would not offer the currency a chance to recover lost ground and once again find its fundamental bearings. The tumble from the dollar on Thursday breaks from the theory that the dollar is the preeminent safe haven currency and thereby holds a strong and negative correlation to growth-linked benchmarks like the S&P 500, crude and bond yields. Does this point to a permanent fundamental rift? Considering it has continued into a second consecutive session, that probability is much higher. On the other hand, risk appetite trends were not particularly aggressive; so there wasn’t a strong impetus to reestablish the link. What’s more, determining the dollar’s connections going forward is likely to be a practice of properly analyzing the euro. In gauging the strength of the dollar, we have seen that it has marked a choppy advance against most of its counterparts and has only really forged ahead in April in May. It is really the currency’s performance against the euro were we see a six-month rally. This tells us one of the primary functions of the US dollar is its role as a liquid alternative to the euro. Therefore, we will need to also analyze the euro to get a sense of the dollar (which is below).

In the meantime, economic and financial health are critical aspects of the dollar’s future that will find greater sway as the weeks roll on. Today’s event risk gave dollar and speculative bulls reason to pause. While interest rate expectations are already minimal, the assumption that the US economy could outpace many of its peers for growth has been delivered a blow these past two weeks. After housing and manufacturing sectors reported discouraging data, the labor market would also report a downshift with a 125,000 jobs lost through the month. This was the first net contraction in six months; but the reading was almost on target with the consensus forecast. Yet, to find the meaningful content, you have to dig. The change in temporary consensus jobs was a heavy influence on this headline figure. Excluding this skew, private payrolls grew a modest 83,000 jobs. A drop in the unemployment rate to 9.5 percent was a sign of a shrinking labor force rather than rising employment. What’s more, earnings growth further cooled to a 1.7 percent pace in the year through June. Ultimately, this data does not support a strong recovery in the labor markets and therefore stunts expectations for a robust pace of economic growth.

Related: Discuss the Dollar in the DailyFX Forum, US Dollar: Six Month Outlook

Euro Holds onto Thursday’s Unexpected Gains, Will a Quiet Auction Week Maintain Bullishness?
The euro had already passed its major stumbling blocks this week by Thursday evening. Recently, economic concerns and interest rate fodder have taken a back seat to financial stability in the European Union. This past week’s debt auctions were less than impressive. Though the ECB withdrew 442 billion euros in liquidity from the banking system, the demand for liquidity is still considerable enough to draw 132 billion euros in three month loans and 111 billion euros in six-day coverage. Furthermore, Spain’s auction of 3.5 billion euros worth of 10-year paper comes at a lower demand, high cost and possible support from non-market sources. These are not indications of a health market; but on the other hand, it does necessarily mean that the financial markets are not in jeopardy of an immediate collapse. At this point, it seems traders are willing to take what they can get. How long will tepid data foot the bill for a recovery? When will growth and rates come back into the picture? It is hard to say. However, should another strong move in risk appetite develop, the shared currency is very likely to reestablish its links. For financing operations, Germany and Australia are scheduled to sell bonds. For insights on what to expect from the ECB rate decision, see the weekly forecast.

British Pound Advances after Moody’s Offers its own Vote of Confidence in the UK
It is back and forth for the British pound where mere comments from the correct person or party can trigger a rally or tumble. Today, sterling traders tuned in to Moody’s assessment of the United Kingdom. The ratings agency said that the nation would keep its top AAA rating should the government stick to its fiscal plan to cut spending by 85 billion pounds going forward. This is not a particularly shocking statement; but it does help to offer a boost in confidence. Now, we have to monitor what Moody’s calls “implementation risks” to see how it truly performs. Next week’s docket holds considerable fuel; but the marquee release is Thursday’s BoE rate decision. Will they allow for a more hawkish tone?

Australian, Canadian Dollars Set for Volatility in Next Week’s Scheduled Event Risk
Both the Australian and Canadian dollars are struggling to maintain their sensitivity to risk appetite trends; but tempered growth and interest rate expectations for both have dulled the connection. Economic data could sharpen the connection. Australia is set to release an RBA rate decision and employment data next week. Canada holds its own labor figures along with the Ivey business activity report.

Japanese Yen and Swiss Franc at Risk from Interventionist Policy Makers
Intervention is a dirty word amongst market participants and policy makers. Nonetheless, when currencies press extremes, the possibility of interference grows. With EURCHF starting to recovery today; the SNB may jump back in to food the tentative euro climb. For Japanese officials, USDJPY is down at levels that Finance Minister Kan has previously hinted were unsustainable. 

For Real Time Forex News, visit: http://www.dailyfx.com/real_time_news/

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

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Written by: John Kicklighter, Currency Strategist for DailyFX.com
E-mail: jkicklighter@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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