Talking Points:
Dollar and S&P 500 Poised for NFP-Driven Volatility
It doesn’t take more than a glance at the charts to see there is serious tension in the markets. On the one hand, the Dow Jones FXCM Dollar Index (ticker = USDollar) is at the top of a two-month range. On the other, the S&P 500’s arc to record high has tapered off steadily from its aggressive drive through the opening two days of the week. For the traditional risk-reward scale, that means we have both the FX market’s preferred safe haven at the top of its recent trading band while the banner man for broader capital market’s speculative stands at a record high. While the greenback has slackened its tether to risk trends, this positioning nevertheless reflects an overextended market. And, all that is needed to trigger a sharp rebalancing is the proper catalyst. Can the NFPs be that spark?
Nowadays, the monthly US labor data is more of a media event than a trader affair. Between a consensus US growth forecast that put it at the head of the developed world curve and the Federal Reserve’s decree that Tapering will continue barring a ‘significant’ change in underlying conditions, the outlook seems steady for the currency. Yet, when we couple speculative bearing with the distinct ‘good or bad’ assessments that are made on this data, there is clear potential. The most potent scenario here would be one where risk aversion is set off. Given the lack of conviction and extreme levels of exposure, capitulation could set send equities and yen crosses careening.
The ideal catalyst for a dollar-favorable move would be a downtick in unemployment (it’s expected to ease to 6.6 percent) and/or material enough beat for NFPs (consensus is 200,000) to spur expectations of a forward shift in rate forecasts. The problem is, that would be difficult to accomplish. Alternatively, a substantive miss could shake growth convictions in the capital markets, but it could also complicate the dollar’s participation as weakened labor conditions could – if not threaten the steady Taper – push back the Fed’s first hike. In an alternative view for risk appetite, a strong reading could also reinforce equity highs – though the greenback response to this is unlikely to be one-for-one.
Euro Slides Despite ECB Hold on Rates, Stimulus
As the majority of market participants and economists had predicted, the European Central Bank (ECB) held its hand on monetary policy this past session. Both groups were attributing more than a 95 percent probability that the policy authority would decide for the fifth consecutive meeting to hold its benchmark lending rate at 0.25 percent and avoid adopting any new unorthodox measures. They were right. And yet, the euro still fell. Meeting the status quo on this month’s efforts would mean shift the focus forward and assessing whether further accommodation would be adopted at future meetings. In ECB President Draghi’s press conference, there was a notable increase in the dovish rhetoric. Though there is still ambiguity to it, the central banker suggested they were ready to move if inflation remained too low for too long. Moreover, they were “unanimous” in favoring unconventional methods and even discussed QE.
Japanese Yen Pairs Rally Over-Extended Ahead of BoJ
While global equities look top heavy, the yen crosses look especially exaggerated. In the past week, these pairs have surged between 1.2 (CHF/JPY) and 2.5 percent (CAD/JPY). The consistency of this move has been equally impressive and concerning. USDJPY has advanced six consecutive sessions through Thursday – the longest run since November 2012 – while pairs like CADJPY and AUDJPY have driven an astounding 10-day plus ramp. Price alone makes the case of a dangerous market, but fundamentals no doubt add to this mix as well. Despite a tax hike initiated this week and concerns of its economic repercussions, the Bank of Japan (BoJ) is expected to decline a QE upgrade at its meeting next week. Until this year, the markets were almost certain of an upgrade. Polls still show heavy belief of a move by July.
Canadian Dollar May See More Action than USD on Jobs Figures
Where there is considerable debate and analysis that will go into the US jobs data, the market’s reactionto the Canadian figures is likely to be straightforward. A better-than-expected reading is more likely to spur a rally while a disappointing print will send the currency sliding. The consensus is for the jobless rate to remain unchanged at 7.0 percent and net payrolls to rise by 22,500. Even if we ‘meet’ expectations, pairs like USDCAD and CADJPY are likely to still generate a breakout as they have simply run out of room and have entries and stops on both sides.
British Pound: What Will the BoE Do to Guide Rate Expectations?
We have seen conviction in UK rate forecasts ebb this week – but not materially. The market is looking for something definitive that would undermine their robust expectations for the BoE to make its first tightening move around March 2015. We have a bank rate decision scheduled next Thursday, but the market is already writing off its impact. With no change comes no guidance.
Australian Dollar Stalled Run Finds Yields Drop, Jobs Data Ahead
Australian bond yields dropped both at the front and back end of the curve this past session. The retreat weighs the return appeal that the carry so desperately needs to rebuild its international cache. Then again, yields move inverse to bond prices – meaning we are likely seeing capital inflow. Next week, we have jobs, inflation expectations and confidence figures on tap. The week after: Chinese 1Q GDP.
Emerging Markets: Finally A Bearish Close
After an incredible 10-day rally – only two of moves of that magnitude having been recorded – the MSCI Emerging Market ETF finally posted a bearish close Thursday. The slip was a mild one however it did come on elevated volume. Risk trends moving forward are key for this grouping of high-return currencies. Next week, watch out for the South Korean and Indonesian central bank rate decisions.
Gold Bulls Look for a Deferred Yield Outlook and Dollar Tumble
Quickly dashing the hopes of early momentum building, gold closed 0.2 percent down this past session. For a bullish recovery, the metal needs a definitive catalyst as speculators are unlikely to see a ‘bargain’ call with loose capital again so soon. Looking for a spark, a dollar drop can act as a very big lever for the alternative-to-fiat asset. Risk aversion could encourage a jump, but it is unlikely to carry as much weight here.