US Dollar Slightly Lower Ahead of NFPs - Reversal Possible if NFPs >+157K
ASIA/EUROPE FOREX NEWS WRAP
Despite the knocks against it – the Federal Reserve is adding $1.02T to its balance sheet this year, the US labor market remains weak relative to previous periods of growth, and the political climate is nothing short of a disaster – the US Dollar is the top performing major currency through the first several weeks of 2013. Why though, given these prevalent concerns?
The return of the US Dollar can’t be discussed without examining the impact of rising Treasury yields, which have also lifted US equity markets. Yield curve theory states that a steepening yield curve is in indicative of either 1) increasing inflation expectations or 2) stronger economic growth. Certainly, with the Federal Reserve’s policy tethered to ZIRP since December 2008, there is a case to be made for the former point, but in my opinion, the recent steepening yield curve has to do with the underlying strength of the US economy. The steepening yield curve, as evidenced by the widening 2s10s Treasury spread (the difference between the US 2-year and 10-year Treasury notes), has been the primary driver of US Dollar strength, removing the US Dollar’s role as strictly a safe haven, and returning to it the aspects of a growth currency. Many point to the USDJPY as the lever in the market for risk appetite, but I’d expand and say both the US Dollar and US equity markets have been supported by an improving interest rate outlook for market participants.
With that said, we need economic data to support the ‘strengthening US economy’ argument, and what could be better evidence than a strong Nonfarm Payrolls report for February? Consensus forecasts range mostly from +142K to +188K (median forecast is +165K, standard deviation of 23K), but anything above +157K (January) could provide that spark for a wider 2s10s spread and a stronger US Dollar.
Taking a look at European credit, peripheral yields are mixed as market participants eagerly away the ECB Rate Decision and ensuing press conference today. The Italian 2-year note yield has increased to 1.174% (+0.2-bps) while the Spanish 2-year note yield has increased to 2.269% (-3.8-bps). Similarly, the Italian 10-year note yield has decreased to 4.633% (-1.5-bps) while the Spanish 10-year note yield has decreased to 4.940% (-3.9-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 12:00 GMT
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TECHNICAL ANALYSIS OUTLOOK
EURUSD: The pair has tentatively broken out of its downtrend off of the February 1 and February 13 highs, working to fight back to the ‘ECB Rally’ break at 1.3220/50 as a result of the disappointing Italian election results. Although the move higher was cued by the breakout in RSI a few days ago, the NFP print could derail the uptrend with ease. Resistance is at 1.3170/80 (21-EMA) and 1.3220/50, while support comes in at 1.3080/90 and 1.3000.
USDJPY: The USDJPY has set fresh highs for the year, as the RSI breakout on 2/28 was the cue for further strength. As US equity markets have hit fresh all-time nominal highs, the USDJPY finally confirmed, on the back of a widening 2s10s Treasury spread (exactly what I’ve been waiting for). Accordingly, the Bull Flag consolidation now points towards 97.70 as the next key area higher.
GBPUSD: I maintain: “Selling persists amid weak data, a dovish and divided Bank of England, and the United Kingdom losing its revered ‘Aaa’ rating...With the ascending trendline off of the 2009 and 2010 lows breaking, as well as the 2010 to 2013 range bottom lows breaking near 1.5300, my bias is to sell rallies. Like the EURUSD, the GBPUSD is consolidating just near its 2013 lows, but has failed at its 8-EMA as it has for the past several weeks, suggesting that the next leg lower may be on the verge of occurring.”
AUDUSD:Earlier this week I said: “The AUDUSD fell into the 1.0330/75 area on Monday, that I’ve been calling for several weeks, and now a bounce has a materialized back into the descending trendline off of the January 22 and February 20 highs, at 1.0250/70 today. However, the daily RSI remains capped below 50, as it has been during the duration of the downtrend. Now would be the time to look short again; however, a break of this RSI barrier, and a daily close above 1.0250/70 would negate the near-term bearish bias. The next level to look higher towards would be 1.0340/80 (mid-February swing highs); a continuation lower eyes a move towards 1.0090/1.0120, then 1.0000.” It appears that the RSI resistance may be breaking, alongside with a break in the downtrend off of the January 22 and February 20 highs. A close above 1.0250/70 today would shift near-term focus towards 1.0340/80.
S&P 500: No change: “The near-term set back at 1530 took place for less than two weeks, but the break higher hasn’t been marked by high volume; no, it has been a volumeless rally, with the breakout occurring on volumes around 80% of the daily average in 2013. This is not a ‘technically strong move.’ The float higher could continue, towards the all-time high at 1576.1, but might be cut short in the 1565/70 zone, where two key Fibonacci extensions lay. I’m very skeptical up here – markets seem to be ignoring Italy and the derisive politics in the United States at the moment (this also happened in 2011 and 2012 at the beginning of those years).”
GOLD: No change: “Gold broke below trendline support off of the January 2011 and May 2012 lows at 1650 last week, prompting a sharp sell-off into 1600, where price broke out in mid-August before a rally into the post-QE3 high at 1785/1805. However, with oversold conditions persisting on the 4H and daily timeframes, a rebound should not be ruled out; each of the past two daily RSI oversold readings has produced a rally in short order. Resistance is 1625 and 1645/50. Support is 1585 and 1555/60. It should be noted that Gold has entered a major support zone from the past 18-months from 1520 to 1575.”
--- Written by Christopher Vecchio, Currency Analyst
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