US_Dollar_Will_Make_Breakout_Bid_as_Market_Uses_NFPs_to_Gauge_Taper_body_Picture_1.png, US Dollar Will Make Breakout Bid as Market Uses NFPs to Gauge Taper

US Dollar Will Make Breakout Bid as Market Uses NFPs to Gauge Taper

Fundamental Forecast for US Dollar:Bullish

  • Technical patterns suggest both US equities and the US dollar are building pressure for a breakout
  • Friday’s November NFPs offers the right kind of event trigger to spur speculation in stimulus and/or risk trends
  • Trade a US Dollar trend shaped by Taper speculation and risk trends using the Dollar Currency Basket

The past week was one of consolidation for both market conditions and price action for the US Dollar. The week ahead though will offer up a clear contrast with breakout risk predicated on technical patterns and key event risk like November NFPs. Tapping into one of the FX and capital markets’ most pressing fundamental themes – stimulus expectations and global investor appetite – is especially important for volatility and trend development going forward as we head into the final trading month of the year.

Historically, December is the most reserved month of the year for volatility and volume. Using the S&P 500 as a benchmark; since 1990, the index has posted its best performance (an average 1.9 percent gain) on the lightest level of participation. That would be an extension of a painfully enduring trend for one of the dollar’s primary counterpoints. Slow and steady gains for the standard effigy of ‘risk appetite’ contradicts the dollar’s safe haven status and dampens the market transactions that would generate volatility for the world’s most-used currency. Yet, there are deviations from the norm; and tapping into underlying fundamental concerns can assure it.

Many feel technicals are a reflection of all known and fully speculated fundamental developments. If that is the case, the patterns we see are very telling. For the benchmark US equity index, we have terminal wedges (a ‘breakout’ is a necessity as the range comes to a terminus) at record highs. From the FX ranks, we have the EURUSD building pressure on a congestion pattern while the volatility reading for the USDollar is near its lowest point of the year. Yet a spark to trigger a break would be constructive. For generating meaningful follow through – much less full blown trend – a tangible fundamental drive is essential.

In the week ahead, we have scheduled event risk that can stir the market’s preoccupation with stimulus programs and may even revive dormant risk appetite trends. At the top of the list for market-movers is the November employment data. The natural carnival-like atmosphere surrounding the monthly labor statistics will ensure interest in the monthly payrolls change (the current consensus from Bloomberg is a net 183,000 payroll increase), but the true fundamental impact comes via the unemployment rate and background statistics.

Back in June, Fed Chairman Ben Bernanke remarked in the press conference following the FOMC policy meeting that the central bank would consider lifting the benchmark rate only after the jobless rate dropped to 6.5 percent and that the QE program was seen ending in the middle of next year with an the unemployment rate around 7.0 percent. The first hike to the benchmark lending rate is no doubt a ways off (likely mid-2015), but the reduction in stimulus will be a meaningful event in its own right. Capping the capital injections will likely lead to a gradual rise in market rates (boosting the competitive appeal of the currency) and temper the moral hazard theme that has buoyed assets (hobbling risk trends that have overrun traditional fundamental valuations).

After the Fed surprised investors by deferring its ‘Taper’ decision in September and the partial government shutdown through the first half of October, the market speculated that the Fed would defer its belt tightening to March. With the nomination of presumed dove Janet Yellen, that belief was reinforced. Yet, Fed statements, members’ speeches and data have repeatedly dispelled the conviction for a far-delayed reduction in the QE3 program. A steady or strong November jobs report would further tip the balance of probabilities for the December 18 or January 29 policy meeting.

Looking at the calendar, there are other milestones that can also have a hand in shaping expectations of external support: service and manufacturing activity surveys, October trade data, home sales numbers and the Beige Book. Yet, the NFPs will act as a beacon for speculators. Given relative stimulus between the US, Eurozone, UK and Japan has shaped recent trends and the knowledge that the Fed’s program is so intrinsically attached to risk appetite; this is the kind of week that can offset seasonal inertia. – JK