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Dollar at Risk of Sharp Reversal Given the Wrong NFP Step

Dollar at Risk of Sharp Reversal Given the Wrong NFP Step

John Kicklighter, Chief Strategist

Talking Points:

  • Dollar at Risk of Sharp Reversal Given the Wrong NFP Step
  • Euro: How Much Worse Can Things Get?
  • British Pound Unmoved by BoE Decision, But Next’ Report Will Hit

Dollar at Risk of Sharp Reversal Given the Wrong NFP Step

Technical traders recognize the Dollar is in an ominously risky position: leaning heavily on an exaggeratedly-consistent, seven-month rising bull trend just before January NFPs is due. The Greenback’s climb has been lurid and blatant these past months, though it was well founded. Against a wave of downgraded economic forecasts and softened monetary policy for its largest peers, the outlook for the US economy looks comparatively robust while the Fed has moved unwaveringly towards a first rate hike. So, while the Dollar doesn’t present the incredible return potential as it had during cycle peaks in past decades, the market was funneled its way because of its ‘relative’ appeal. That said, a modest comparative return will be sensitive to change and no market moves in a straight line forever. Against a mature trend and growing claims of a ‘one-sided’ bet (speculative futures interest has soared to a record long), the risk from the payrolls is more significant to the downside.

From the labor report, there are two divisions that need to be accounted for to gauge impact: time frame and theme. For the former, all event risk can have a short-term (volatility) impact and lasting trend contribution. Given the technical pressure in the market and the abundance of worrying headlines, this release can prove a spark. And, the most readily understood and heavily publicized datum from the suite is the nonfarm payrolls. For trend implications, the measures that change the trajectory of growth and rate forecasts are critical. The unemployment rate is a common reference in policy decisions, but the wage inflation measure may prove the crux of the Fed’s timing moving forward as it is the upstream inflation pressure. Perhaps even more important than separating the immediate and lasting impact of the data is establishing what ‘theme’ is most impelled. Interest rate expectations have proven a key driver for the Dollar, and this data can fuel that speculation…for better or worse. Yet, given how disparate the Fed view already is, the risk is much heavier for ‘disappointment’ – even though we are unlikely to see the outlook turn from ‘hawkish’ to ‘dovish’. Arguably the most vulnerable dynamic in this event risk though is sentiment. Equities remain at nosebleed levels despite a troubled outlook. Would a slowing US economy or the reality of a Fed removing accommodation pose more risk?

Euro: How Much Worse Can Things Get?

‘How much worse can things get for the Eurozone.’ That is the question many investors, lawmakers and citizens are asking themselves. Growth and unemployment forecasts are painful but they have started to tick higher. The loud ticking on Greece’s debt standoff clock grew louder after the ECB removed its waiver on liquidity lines, but there is room to compromise. And, of course, there is a sizable stimulus effort due to power up at the beginning of next month. The reality of the situation though is that conditions can worsen. Stimulus vows can fail to generate growth, prevent sovereign contagion and stabilize financial tremors that originate outside of the region. So, even in the event of a relief rally, the clouds may not fully lift. Next week, the focus remains on Greece and the Euro-area’s 4Q GDP data will be top ‘traditional’ event risk.

British Pound Unmoved by BoE Decision, But Next’ Report Will Hit

It comes as little surprise that the Bank of England rate decision Thursday would generate little clarity on the policy group’s intentions for the future – if there is no change in rates or unorthodox programs, they offer no insight. In contrast, next week’s BoE Quarterly Inflation Report is the high water mark for insight on rate expectations. Over the past months, hopes for a near-term rate hike have all but vanished and a full 25 bps of tightening has even been pushed into 2016. The dovish conviction may be overdone. It wouldn’t take much to shake the shorts up.

Canadian Dollar Will Trade Counterparty Catalyst for Local Employment Data

Depending on what currency pair we are looking at, the Canadian dollar is frequently strong armed by a more active counterpart (USDCAD) or adapted to an offshoot theme (CADJPY for risk sensitivity). From Friday’s docket though we will see a capable, inherent market mover for the Loonie in the Canadian employment data. The BoC’s surprise rate cut at its last meeting will shade the market’s read on the data.

Oil’s Extreme Volatility Temporary Dislocation or the Future for Other Markets?

Volatility has grown for most asset classes since the middle of last year. Yet, no benchmark market has seen the kind of extreme activity that oil has. This past session, the active US-based WTI crude oil future contract rallied 4.2 percent. That followed an astounding 8.7 percent tumble. The CBOE’s oil volatility index is currently 63.1 percent. That is the highest level for the series in nearly six years and a significant premium over most other assets (equities, FX and fixed income). So, is this a temporary digression from or the path for other markets?

Emerging Markets: Risk Trends, Ukraine, Global Stimulus Concerns Surprisingly Low

Emerging Market capital asset benchmarks have taken a mixed road. Though they have recovered these past weeks, there seems little conviction to keep funds from moving in. The menace of risk trends and monetary policy distortions (both easing and then withdrawal) feed unease. So while issues like Ukraine, stimulus tides and quick drops on various risk assets seem to be weathered; fear is building.

Gold: Low Yield and a Hobbled Dollar Would Go a Long Way

Like many other well-trodden markets, gold has worked itself into a terminal range – one that inevitably must end in a move either higher or lower. What direction we take depends a lot on how effective the upcoming NFPs data is. If the Dollar stumbles on the back of tempered rate forecasts, the metal’s pricing instrument will be devalued and global yields will ease (making a cash asset like gold a little more appealing). Demand has recently soared amongst both speculative futures and ETF interests. Will they find reason to keep building?

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ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

22:30

AUD

AiG Performance of Construction Index (JAN)

44.4

Has been declining since Sept 2014

23:50

JPY

Official Reserve Assets (JAN)

$1260.5B

Has remained flat in 2014.

5:00

JPY

Coincident Index (DEC P)

110.5

109.2

Both measures have been declining in 2014.

5:00

JPY

Leading Index (DEC P)

105.4

103.9

5:30

AUD

Foreign Reserves (JAN)

A$65.7B

Has been rising in 2014.

7:00

EUR

German Industrial Production (YoY) (DEC)

-0.30%

-0.50%

Measures the manufacturing sector’s performance of the Eurozone’s largest economy

7:00

EUR

German Industrial Production (MoM) (DEC)

0.40%

-0.10%

8:00

CHF

Foreign Currency Reserves (JAN)

495.1B

Has been rising in 2014.

8:15

CHF

Retail Sales (Real) (YoY) (DEC)

-1.20%

Last month’s figure was below the average increase for 2014.

9:30

GBP

Total Trade Balance (DEC)

-£1700

-£1406

The trade deficit has been declining in 2014. A lower EUR/GBP might weigh on future exports to the EU which is the UK’s largest trading partner.

9:30

GBP

Visible Trade Balance (DEC)

-£9100

-£8848

9:30

GBP

Trade Balance Non EU (DEC)

-£3000

-£2649

13:30

USD

Change in Non-Farm Payrolls (JAN)

230K

252K

It has been expanding by an average 255K per month in 2014. A strong measure might impact the market’s expectation of Fed hiking rates in 2015.

13:30

USD

Unemployment Rate (JAN)

5.60%

5.60%

It has been declining in 2014 as the US economy is strengthening

13:30

USD

Underemployment Rate (JAN)

11.20%

Has been declining in 2014.

13:30

USD

Labor Force Participation Rate (JAN)

62.7%

62.7%

The measure is close to a forty year lows which might signal that less people are in the labor force.

13:30

USD

Average Hourly Earnings (MoM) (JAN)

0.3%

-0.2%

The last measure showed a drop in the growth rate of hourly earnings.

13:30

USD

Average Hourly Earnings (YoY) (JAN)

1.9%

1.7%

13:30

CAD

Unemployment Rate (JAN)

6.7%

6.7%

Unemployment has declined in 2014. The BOC cut interest rates last month due to lower oil prices impacting the petroleum sector.

13:30

CAD

Net Change in Employment (JAN)

5.0K

-11.3K

13:30

CAD

Participation Rate (JAN)

65.7

65.7

The previous measure was the lowest in15 years.

13:30

CAD

Building Permits (MoM) (DEC)

5.0%

-13.8%

A recovery is expected after the previous measure showed a drop.

20:00

USD

Consumer Credit (DEC)

$15.00B

$14.081B

Previous measure was below the average consumer credit in 2014.

GMT

Currency

Upcoming Events & Speeches

00:30

AUD

RBA Statement on Monetary Policy

17:45

USD

Fed's Lockhart Speaks on U.S. Economy in Florida

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

15.5900

2.5000

12.7000

7.8165

1.3650

Resist 2

8.7400

7.1000

8.4735

Resist 1

15.0000

2.4500

11.8750

7.8075

1.3475

Resist 1

8.4000

6.8500

7.8360

Spot

14.7857

2.4388

11.3131

7.7525

1.3449

Spot

8.2469

6.4918

7.5202

Support 1

14.3800

2.3900

10.2500

7.7490

1.3200

Support 1

7.5200

5.9100

7.2945

Support 2

13.6800

2.1900

9.3700

7.7450

1.2000

Support 2

7.3285

5.7775

6.7280

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

1.1604

1.5480

118.62

0.9349

1.2578

0.7929

0.7512

136.37

1291.44

Res 2

1.1570

1.5442

118.31

0.9319

1.2544

0.7903

0.7486

135.94

1284.80

Res 1

1.1537

1.5404

118.01

0.9289

1.2510

0.7876

0.7460

135.51

1278.16

Spot

1.1469

1.5329

117.41

0.9229

1.2442

0.7824

0.7408

134.65

1264.88

Supp 1

1.1401

1.5254

116.81

0.9169

1.2374

0.7772

0.7356

133.79

1251.60

Supp 2

1.1368

1.5216

116.51

0.9139

1.2340

0.7745

0.7330

133.36

1244.96

Supp 3

1.1334

1.5178

116.20

0.9109

1.2306

0.7719

0.7304

132.93

1238.32

--- 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

Sign up for John’s email distribution list, here.

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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