Investors Set to Digest Key Monthly Emplyment Report; Fed Watching Closely
- Greek PSI to go through; helps bolster risk appetite
- US NFPs due later; could impact Fed policy
- EU final decision on Greece second bailout ahead
Presumably, the renewed bid tone in the markets over the past 24 hours has been primarily driven off the fact that Greece has secured very high take up rate for the debt swap deal. Market participants have found comfort in this fact and the successful passage of the deal will help eliminate any added unwelcome uncertainty in a still shaky global macro environment. However, from here, we are not all that confident in the prospects for additional risk buying on Friday and things are expected to pick up into the latter half of the day with the all important monthly US NFP data, immediately followed by the EU’s final decision on Greece’s second bailout.
Today’s NFP report will take on added meaning, with the numbers likely to fuel more intense speculation over what the Fed will do at next week’s policy meeting. In recent weeks, it has become more apparent that the signs of pickup in the US economy are starting to impact the Fed and any additional confirmation of steady recovery could very well inspire an earlier reversal of monetary policy than expected. Interestingly enough, we therefore see the risks from today’s data tilted to the downside no matter what the number. Should the NFP number come in better than expected, this will scare markets into thinking that the Fed will indeed look to adopt a less dovish tone at next week’s meeting. Less dovish to investors translates into higher funding costs for equity investments and a reduction in stimulus incentives. As such, better NFP could very well mean lower equities and stronger US Dollar on narrowing yield differentials.
On the other hand, should the NFP data come out weaker than expected, risk markets will likely come under pressure on concern for the weaker data, and although this will do more to keep the Fed from shifting its policy stance, we feel it will still be too hard for investors to feel good about buying risk on a bleaker US employment picture. Overall, our outlook for today’s NFP data jives well with our bearish view of US equities and risk. We continue to have a hard time accepting that US equities are so close to the record 2007 highs with the global economy having gone through a major recession over the past few years. While we understand the incentive of buying equities at ultra attractive valuations given the historically low rate environment, we still feel that the more realistic scenario from here is for a renewed bout of weakness in US and global equities.
EUR/USD: Setbacks have been supported for now by the 50-day SMA and top of the Ichimoku cloud and the market seems to be content on some sideways consolidation before making any clear directional move. The key levels to watch above and below come in by 1.3325 and 1.3095 respectively, and we will need to see a break and close above or below either for an indication of where this market could be headed over the short-term. A close above 1.3325 will reintroduce the possibility for additional gains towards 1.3500, while a close back under 1.3095 will open deeper setbacks towards next key support at 1.2975 further down.
USD/JPY:The market is doing a good job of showing the potential for the formation of a major cyclical bottom after taking out the 200-Day SMA and now clearing psychological barriers by 80.00 for the first time in 6 months. This further solidifies basing prospects and we could be in the process of seeing a major bullish structural shift that exposes a move towards 85.00-90.00 over the coming months. At this point, only back under 77.00 would delay outlook and give reason for concern. However, in the interim, it is worth noting that gains beyond 82.00 over the coming sessions could prove hard to come by with technical studies needing to unwind from their most overbought levels in over 10 years before a bullish continuation. As such, we would caution buying breaks above 82.00 for the time being and instead recommend looking for opportunities to buy on dips into the 78.00-80.00 area.
GBP/USD: Overall, this market is going nowhere right now and remains confined to a choppy multi-day range. This range has been loosely defined between the 100/200-day SMAs, and at this point, it will take a clear and sustained break above the 200-Day SMA or back below the 100-Day SMA for additional clarity into the broader direction.
USD/CHF: Setbacks have stalled for now just ahead of 0.8900 and the market could finally be looking to carve the next medium-term higher low ahead of a bullish resumption and eventual break back above 0.9660. Look for additional gains over the coming sessions back towards 0.9300, with a break above to confirm and accelerate. Ultimately, only a drop below 0.8930 negates and gives reason for pause.
--- Written by Joel Kruger, Technical Currency Strategist
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