Dollar Traders Will Interpret NFPs For QE3 Outlook

While the USD/JPY’s incredible 3.4 percent rally stands a strong sign of the dollar’s inherent value against a fellow ‘safe haven’ currency, the benchmark currency was notably weaker against the balance of the liquid FX market. However, greenback weakness for pairs like EUR/USD and GBP/USD are more reflections of hesitance ahead of another wave of serious event risk rather than a sign of weakness. The real market-moving potential for the dollar – and possibly systemic risk interests – comes in the upcoming session’s nonfarm payrolls (NFP).

Through the past session, the equally-weighted Dow Jones FXCM Dollar Index (USDollar) was heavily skewed by its pairing with the freshly-deflation Japanese yen. Given the extreme move from USD/JPY (the biggest daily rally since October 28, 2008), the Index managed a 0.5 percent advance of its own and unofficially ended the bearish leg that pulled the benchmark from its two-and-a-half year high set back in early March. The fundamental significance of the Fed’s largest counterparts updating their stimulus efforts is certainly a serious consideration for the dollar itself. The level of stimulus in a system has a direct association to the value of an individual currency. Therefore, the Bank of Japan’s (BoJ) and European Central Bank’s (ECB) reflections on further easing implicitly leverages the appeal of the dollar. And, the maturity of that endeavor matters just as much as – if not more than – the magnitude of the program. That ‘newness’ is a consideration that can see the euro or yen weighed more heavily than the dollar even if their programs are notionally smaller.

When it comes to monetary policy programs, the Fed’s effort is still the largest and arguably most influential on a global basis. It is that assertion that pegs the upcoming US employment report as the most important economic report this week. Rather than the FOMC’s actual monetary policy event where the group is prone to use boiler plate language and reiterate its commitments, the speculative ranks can garner a far better appraisal of the Fed’s time table for curbing and eventually reversing its Quantitive Easing (QE) efforts through the upcoming jobs numbers. The NFPs figure is for surface volatility. The deep cut is the level of unemployment. The Fed has said it will keep its accommodative stance until the jobless rate reaches 6.5 percent. Yet, interpreting ‘Fed-speak’, we can see the end of the monthly stimulus programs well before we reach that level. Even regular policy dove John Williams suggested the current pace could see stimulus taper by the summer.

Japanese Yen Collapses after BoJ Pulls Out All Stimulus Stops
Considering the yen plunged between 3.3 and 4.3 percent against all of its liquid counterparts this past session, it is safe to say that the Bank of Japan’s stimulus upgrade at least met the market’s already aggressive expectations. But, did the group’s policy jump move far enough to extend its already 25 percent tumble? Looking at the details, the BoJ announced its intention to double the nation’s money supply and will immediately adopt a ¥7 trillion-per-month ($74 billion) bond purchase program. Furthermore, the group will look to buy longer-dated government bonds, will drop a bank note rule and buy more ETFs and REITs. Notionally, this program is smaller than the Fed’s effort; but as a scale of increase or relative to GDP, it is larger. There is no doubting that the scope of this effort is impressive. However, there is a disturbingly easy way it can fall apart on the BoJ – risk aversion. If equities and other richly-priced assets falter, the low yield of yen carry pairs will suffer.

British Pound Rebound after BoE Foregoes Stimulus Peculiarly Mild
It seems the government’s remit – allowing the Bank of England (BoE) to pursue easing to support growth at the expense of inflation – did little to actually sway the country’s monetary policy group from their neutral bearing. The BoE ended its policy meeting Thursday exactly as it has numerous months before – with no change or guidance on the future. That 1,300-pip drop from GBP/USD is looking far more suspect. And yet, despite a mum MPC and market-wide advance for the pound, the cable has so far held 1.5250. It is likely that the majority at the BoE eventually shifts to a dovish regime; but even then, there seems little interest to compete on the scale of the Fed or BoJ.

Euro Recovers from Troubled ECB Forecast with Look to Balance Sheet
As expected, the ECB stuck to its guns. The contrast of a central bank on hold – and actually shrinking its balance sheet through LTRO repayments – was prominent enough to drive the euro higher this past session. However, moving forward, there is room for bearishness through monetary policy. In ECB President Draghi’s comments, there was a clear downgrade in growth forecasts and activity concerns. Moreover, we are hearing about debate on rate cuts and new stimulus. Given the euro’s strength on the wind down, there can be weight to this discussion.

Canadian Dollar Advances Ahead of Volatility-Inducing Jobs Data
Everyone is focused on the US employment data – and for good reason. If the American labor report improve materially, the positive trade implications for Canada will be offset by the likely risk aversion move on QE3 withdrawal. That is a consideration through the medium-term. Short-term, we should look at the potential volatility through the Canadian jobs figures. This series has stirred a lot of action over the months.

New Zealand Dollar: Inflation Linked Bond Sales Shows Strong Demand
The New Zealand dollar’s performance this past session was mixed. A titanic rally against the Japanese yen makes sense for the stimulus factor, yet the presumed positive implications for traditional risk makes the slide versus the pound and euro unusual. We should keep sight of the kiwi’s investment appeal. On that front, an inflation-linked bond sale of 2025 bonds drew demand of 3.8 times the NZ$200 million offered.