Dollar, Equity Traders Prepare for Explosive NFPs Reaction
Two weeks ago, Fed Chairman Ben Bernanke announced the central bank’s rough time table for the long awaited, long-feared ‘Taper’. The volatility that followed was turbulent, but the true market shift has been reserved for event risk like the upcoming NFPs. This labor report is exceptionally momentous because it represents the key measure for the central bank and it is the first update we are receiving since the change from a ‘we will maintain the $85 billion-per-month stimulus program in place unless’ to ‘we will reduce the $85 billion-per-month stimulus program unless’ position. Months ago, in an effort to clarify its position with guidance, the Federal Reserve stated plainly that it would maintain its accommodative stance until the jobless rate returned to 6.5 percent and inflation held below 2.5 percent. That is the threshold to shift from easing to tightening, but with the update in June; it is now the expectation that QE3 ends with 7 percent and is curbed before that.
Given the focus for monetary policy, traders’ should pay specific attention to the unemployment rate. The headline payroll is certainly flashy, and will very likely spark volatility should there be a sizable deviate from the current 165,000-consesus (via Bloomberg’s survey). Yet, it is the jobless rate that can spur the market to action and keep it moving. The expectation for the rate is for a downtick from 7.6 to 7.5 percent, which would match the lowest level since December 2008 set in April. Simply meeting that expected improvement can roil risk assets given the Fed’s lean. Looking at the early release employment figures, the ADP figure and jobless claims both support a better outcome (which again, is negative for the S&P 500, carry trade, Treasuries due to taper). However, most remarkable for this particular month’s showing was the sharp pickup in the ISM non-manufacturing sector survey’s employment gauge. Services account for nearly three-quarters of US jobs.
Looking beyond policy, the market impression this event risk carries for market’s is severe because of the extreme positioning behind risk assets and the effort made to ‘front-run’ stimulus efforts. With a mere change in key words amongst Fed officials, we have seen heavy moves in Treasuries, mortgage-backed securities funds and the US dollar. Yet, there is far more ‘deleveraging’ in risk and stimulus positions to be had should we find confirmation. From the FX market, we find the USDollar positioned at a trend line resistance that has capped the entire series. That can be transcribed to EUR/USD at 1.2800, AUD/USD slipping below 0.9000 and even USD/JPY move back down below 99 or even 94. Perhaps even more explosive though is the reaction that can befall the S&P 500. A holdout to external support, this overleveraged benchmark has yet to spill any of its exposure. Alternatively, expensive risk-trades like equities are not good opportunities for a ‘weak’ jobs report that secures QE3 further into the future. Yet, the USDreversing off its long-term trendline…
Euro Drops, European Shares Rally after ECB Copies Fed
Given the anchor on the dollar due to the absence of US speculative interests and expectations for Friday’s employment report, EUR/USD’s 0.7 percent drop – the second biggest in two months – is quite impressive. The Euro-area headlines did their job to move the markets. The ECB rate decision was top event risk. There was no expectation for a material change in rates (benchmark or deposit) or the introduction of new extraordinary programs. On that point, they wouldn’t disappoint. However, what the policy group did do was increase their communication via clarifying their guidance. Mimicking the Fed, President Draghi said they intended to keep rates at current levels or lower for an “extended” period. This doesn’t lower the euro’s yield, but neither does it help recessions or sovereign yield pressures. Watch Greece and Portugal.
British Pound Plunges after BoE Says Guidance Coming
The sterling was the worst performer on the day – thanks to the Bank of England (BoE). At his first official meeting at the helm of one of the world’s largest central bank, Governor Mark Carney didn’t introduce the stimulus that many had expected him to usher in. If the market were heavily positioned for an immediate escalation of bond purchase, the FLS program or something similar; the pound would have rallied on the hold. However, we can see that the reaction was exactly the opposite as the unrealistic price was tempered well before the event. What Carney would offer is guidance. Shedding the cloak of silence on rate holds, he noted volatile asset markets and trouble with rising yields.
Canadian Dollar Risks Volatility on Local Employment ReportMost of the markets will ignore everything but the US employment figures – and well they should. The US data will carry over to global sentiment and thereby has the reach to impact everything. However, if you are trading the loonie; it is important to monitor the Canadian jobs data as well – especially on pairings other than USD/CAD or CAD/JPY. A modest 7,500 jobs are expected to have been shed this past month, but then again the previous month’s reading was more than six times expectations. This data has a history of surprise, and reaction to support it.
New Zealand Dollar Alluring with it Soaring Sovereign Yields
As long as there is a steady wind towards risk aversion, the New Zealand dollar will remain under selling pressure as investor look to unwind tepid carry trades in favor of safety. However, should risk trends level off and historically low differentials draw the ‘yield chase’ once again; the rate forecast in New Zealand is at a two-year high (+65 bps) and the 10-year government bond yield at a 21-month high 4.30 percent.
Swiss Franc to Lose its Top Spot for Managing Global Funds?
We have discussed the meaningful – but perhaps timely – transition that Switzerland is experiencing with its status as the world’s premiere manager of foreign capital due to its bend towards opening up banks’ account to foreign governments. This past session, a Price Waterhouse Coopers survey showed that managers believe the Swiss can lose their title to Singapore by 2015 at this pace.
Gold Bugs Spurned by ECB, BoE Look for Redemption in NFPs
Had there by a cut to rates or a material increase in stimulus by the ECB or BoE, gold would have regained some of its appeal as an alternative to manipulated currencies – and thereby could have reclaimed more lost ground. However, neither central bank would provide. Now it is up to the NFPs and their implications for the Fed’s Taper timetable. If the September easing of the $85 billion pace is confirmed, the metal will come under selling pressure again. Alternatively, any reprieve from this burden can find an oversold asset some ground.
Two weeks ago, Fed Chairman Ben Bernanke announced the central bank’s rough time table for the long awaited, long-feared ‘Taper’. The volatility that followed was turbulent, but the true market shift has been reserved for event risk like the upcoming NFPs. This labor report is exceptionally momentous because it represents the key measure for the central bank and it is the first update we are receiving since the change from a ‘we will maintain the $85 billion-per-month stimulus program in place unless’ to ‘we will reduce the $85 billion-per-month stimulus program unless’ position. Months ago, in an effort to clarify its position with guidance, the Federal Reserve stated plainly that it would maintain its accommodative stance until the jobless rate returned to 6.5 percent and inflation held below 2.5 percent. That is the threshold to shift from easing to tightening, but with the update in June; it is now the expectation that QE3 ends with 7 percent and is curbed before that.
Given the focus for monetary policy, traders’ should pay specific attention to the unemployment rate. The headline payroll is certainly flashy, and will very likely spark volatility should there be a sizable deviate from the current 165,000-consesus (via Bloomberg’s survey). Yet, it is the jobless rate that can spur the market to action and keep it moving. The expectation for the rate is for a downtick from 7.6 to 7.5 percent, which would match the lowest level since December 2008 set in April. Simply meeting that expected improvement can roil risk assets given the Fed’s lean. Looking at the early release employment figures, the ADP figure and jobless claims both support a better outcome (which again, is negative for the S&P 500, carry trade, Treasuries due to taper). However, most remarkable for this particular month’s showing was the sharp pickup in the ISM non-manufacturing sector survey’s employment gauge. Services account for nearly three-quarters of US jobs.
Looking beyond policy, the market impression this event risk carries for market’s is severe because of the extreme positioning behind risk assets and the effort made to ‘front-run’ stimulus efforts. With a mere change in key words amongst Fed officials, we have seen heavy moves in Treasuries, mortgage-backed securities funds and the US dollar. Yet, there is far more ‘deleveraging’ in risk and stimulus positions to be had should we find confirmation. From the FX market, we find the USDollar positioned at a trend line resistance that has capped the entire series. That can be transcribed to EUR/USD at 1.2800, AUD/USD slipping below 0.9000 and even USD/JPY move back down below 99 or even 94. Perhaps even more explosive though is the reaction that can befall the S&P 500. A holdout to external support, this overleveraged benchmark has yet to spill any of its exposure. Alternatively, expensive risk-trades like equities are not good opportunities for a ‘weak’ jobs report that secures QE3 further into the future. Yet, the USDreversing off its long-term trendline…
Euro Drops, European Shares Rally after ECB Copies Fed
Given the anchor on the dollar due to the absence of US speculative interests and expectations for Friday’s employment report, EUR/USD’s 0.7 percent drop – the second biggest in two months – is quite impressive. The Euro-area headlines did their job to move the markets. The ECB rate decision was top event risk. There was no expectation for a material change in rates (benchmark or deposit) or the introduction of new extraordinary programs. On that point, they wouldn’t disappoint. However, what the policy group did do was increase their communication via clarifying their guidance. Mimicking the Fed, President Draghi said they intended to keep rates at current levels or lower for an “extended” period. This doesn’t lower the euro’s yield, but neither does it help recessions or sovereign yield pressures. Watch Greece and Portugal.
British Pound Plunges after BoE Says Guidance Coming
The sterling was the worst performer on the day – thanks to the Bank of England (BoE). At his first official meeting at the helm of one of the world’s largest central bank, Governor Mark Carney didn’t introduce the stimulus that many had expected him to usher in. If the market were heavily positioned for an immediate escalation of bond purchase, the FLS program or something similar; the pound would have rallied on the hold. However, we can see that the reaction was exactly the opposite as the unrealistic price was tempered well before the event. What Carney would offer is guidance. Shedding the cloak of silence on rate holds, he noted volatile asset markets and trouble with rising yields.
Canadian Dollar Risks Volatility on Local Employment ReportMost of the markets will ignore everything but the US employment figures – and well they should. The US data will carry over to global sentiment and thereby has the reach to impact everything. However, if you are trading the loonie; it is important to monitor the Canadian jobs data as well – especially on pairings other than USD/CAD or CAD/JPY. A modest 7,500 jobs are expected to have been shed this past month, but then again the previous month’s reading was more than six times expectations. This data has a history of surprise, and reaction to support it.
New Zealand Dollar Alluring with it Soaring Sovereign Yields
As long as there is a steady wind towards risk aversion, the New Zealand dollar will remain under selling pressure as investor look to unwind tepid carry trades in favor of safety. However, should risk trends level off and historically low differentials draw the ‘yield chase’ once again; the rate forecast in New Zealand is at a two-year high (+65 bps) and the 10-year government bond yield at a 21-month high 4.30 percent.
Swiss Franc to Lose its Top Spot for Managing Global Funds?
We have discussed the meaningful – but perhaps timely – transition that Switzerland is experiencing with its status as the world’s premiere manager of foreign capital due to its bend towards opening up banks’ account to foreign governments. This past session, a Price Waterhouse Coopers survey showed that managers believe the Swiss can lose their title to Singapore by 2015 at this pace.
Gold Bugs Spurned by ECB, BoE Look for Redemption in NFPs
Had there by a cut to rates or a material increase in stimulus by the ECB or BoE, gold would have regained some of its appeal as an alternative to manipulated currencies – and thereby could have reclaimed more lost ground. However, neither central bank would provide. Now it is up to the NFPs and their implications for the Fed’s Taper timetable. If the September easing of the $85 billion pace is confirmed, the metal will come under selling pressure again. Alternatively, any reprieve from this burden can find an oversold asset some ground.