Dollar In NFPs Pull Unless Risk, Euro Surge Develop
The Dollar’s trading band is tightening ahead of the ever-ominous NFP employment report due on Friday. Limited room for market oscillation along with substantial event risk is the standard recipe for meaningful breakouts. However, we also have to take into account the evolving sensitivities of the greenback and capital markets (risk trends) to the Fed Taper bearings. Has the market acclimated to the steady pace of reduction in QE purchases and no longer considers it a threat to risk appetite (catering to safe haven appeal)? Does the move to curb stimulus expansion give us insight into the timing of the central bank’s eventual return to a rate hike regime (bolstering its yield outlook)? While we can find volatility without resolving these important questions, we can’t have a genuine trend without it.
This past session, we were presented with a suitable dry run. On the data front, the ADP payrolls and ISM service sector survey offered a strong round of data to shape Friday’s BLS (Bureau of Labor Statistics) expectations. Private payrolls grew less than expected with a 139,000 increase that was below the consensus – and the previous month’s reading was downgraded to a 17-month low. Just as concerning, the service sector’s employment component – most US jobs exist in this sector – collapsed. Instead of simply benchmarking the NFP number, we need to assess whether the outcome is likely to be ‘bad’ enough to stay the Fed’s hand on further Tapering. Central banker after central banker has stated bluntly that the stimulus wind down is status quo, and the requirements to turn us off that path are exceptional. That being said, a softening labor figure alongside a negative financial market response can add up to the kind of ‘risk off’ the dollar outperforms in.
Euro Traders Look to See if ECB Will Break EUR/USD, EUR/JPY
Monetary policy meetings – especially amongst the major central banks – have lost a significant amount of their market influence over the past few years. That is a natural side effect of fostering a historically low level of interest rates across the board. However, the ECB’s rate decision due today carries with it far more speculative interest than we have seen in most other central banks. Debate over and interest in this particular meeting is the greatest we’ve seen since the lead up to the November meeting which ended in a rate cut. The IMF framed the issues nicely this past session when it issued a warning that the Eurozone is facing risk with inflation in its ‘danger zone’ which in turn could sabotage economic recovery, working off indebtedness and lower unemployment. Their recommendation: both cut the benchmark lending rate and either inject liquidity into the banking system (LTRO) or purchase assets (QE).
The IMF is known for taking the ‘do more’ approach, but there is considerable debate within the market for this event as well. According to Bloomberg, 14 of 54 polled economists believe there will be some sort of rate cut to the benchmark (either to 0.15 or 0.10 percent). That is one option for the central bank – and alone it would likely carry little lasting encouragement for inflation and encouraging loan growth. Another popular option to halt sterilization (draining money) from the ECB’s sovereign bond holdings would similarly fall short of anything but bolstering liquidity alone. A negative deposit rate or LTRO top-off is a more dramatic move with lasting economic and financial implications – and it would certainly present a stronger Euro selloff case. The most bearish outcome for the currency: outright QE. It is also the lowest probability.
Yen Crosses Advance a Third Day but at a Slower Clip
In early morning trade Thursday morning, we find the yen crosses pushing higher. If we close in the green today, it would be the third consecutive daily advance from these crosses following Monday’s market-wide ‘risk off’ slump. Of course, as we close in on significantly levels – just like the S&P 500 at record highs – the conviction and pace of the yen selling (yen cross advance) is cooling. The Nikkei 225 this morning is above 15,000 again which keeps the FX counterparts on a bullish footing. Yet, USDJPY implied volatility is still bouncing at 14 months lows.
British Pound: Watch Gilt Yields, Not BoE Statement
We shouldn’t let our exuberance for the ECB rate decision lead us to entertain hopes for a dramatic pound response to the Bank of England (BoE) policy meeting coming up. The central bank traditionally does not update the market on its bearings when no changes are made – and no change is expected. That said, data is softening for rate forecasts (the BRC inflation figure hit a series low). Watch gilt yields for sterling bearing.
Swiss Franc: SNB Officials Eyeing ECB Decision Anxiously
If the Euro comes under pressure in response to the ECB decision, the EUR/CHF could suffer another drop towards the SNB’s imposed 1.2000-floor. That is no doubt the concern of the Swiss central bank.We’ve seen the pair drop to 1.2100 for the first time in over a year already this week on European-Ukrainian troubles. The ECB can add another element. But how bold would traders be? Breaking the SNB is improbable.
Canadian Dollar Facing Breakout Risk in Second of Three-Day Data Run
This past session, the Bank of Canada maintained its benchmark interest rate and its neutral forecast while projecting inflation to hold below 2 percent with 2015 GDP around 2.5 percent. This was as ‘in-line’ as the event could have been. Now for the second day of a three-day stretch. A manufacturing survey and building permits figure are due this session. Friday, we have the Canadian jobs figures for February.
Emerging Markets Volatility Collapses – The Most Troubling Outcome
Most emerging market currencies – and particularly those that have maintained the highest correlation to ‘risk trends’ – were gaining against the safe haven dollar this past session. The MSCI Emerging Market ETF meanwhile was little changed and the sector’s volatility index neared a six month low. Rather than reassure, this should concern. Issues in the Ukraine are not settled and risk catalysts lie ahead. This is unnatural quiet.
Gold Correlation to USD an Anchor but ECB May Weigh In
With the global political and economic fears tied into the Ukraine standoff easing, gold’s finicky safe haven status is fading. That said, the metal still managed a modest gain Wednesday to keep the 2014, gradual bull trend in place. The next move from this commodity will likely be news dependent. A big stimulus upgrade from the Euro could charge its anti-fiat appeal. Otherwise, we wait for Friday’s US Dollar reaction to NFPs.