Dollar Advances A Second Day But Risk Not Yet Supportive

On a net basis, the dollar squeezed out a second daily advance through Thursday. However, this strength must be attributed to an exceptional performance for EUR/USD whose influence as a greenback counterpart was leveraged thanks to tame risk trend conditions elsewhere. That is decidedly unconvincing of innate strength from the market’s most liquid currency.

Yet, considering the dollar’s role in the market is a as benchmark safe haven currency and sentiment-bred trends have been curbed by both fear of unwieldy event risk and a severe lack of speculative participation, its drift against most other majors seems more appropriate. Such conditions may actually play to a considerable swell for the currency across the board in the upcoming session though. With the market’s and media’s favorite nonfarm payrolls (NFP) release on deck, we have the proper tools to spur volatility in risk trends – and thereby the necessary ingredients for a quick dollar move.

Heading into the labor statistics dump (scheduled for 13:30 GMT), the consensus forecast for the headline net change figure is calling for a rather safe 85,000-position net increase through November. This is the figure people will look to first, but it is the jobless rate that carried more weight – even overwhelming the payrolls change a few times – nowadays. Recent, secondary employment data has leaned towards a weaker reading for the labor market than what the consensus may be allowing for. Considering we haven’t seen a net decline in payrolls since August 2010, there is a considerable risk of complacency and dramatic reaction to a negative number.

An uptick in the unemployment rate would draw the same concern. Just as important as the "surprise quotient," we must also set expectations for the extent of impact. A positive reading would carry the least influence. Preoccupation with big ticket items like next week’s Fed decision and the fiscal cliff will dampen such a move. Alternatively, a risk selloff on a weak reading can encourage a correction on potentially extended sentiment-linked markets. The follow through on such a move would likely be tempered by bigger issues through the immediate future, but it could once again sync disparate markets.

Euro Suffers Biggest Drop in a Month on ECB Concerns
Without doubt, the biggest move on an otherwise tame day was the tumble the euro suffered Thursday. The uniform decline against safe haven and high-yield counterpart alike (though the former made more progress) tells us this was a performance unique to the shared currency itself. There were a few fundamental highlights – such as news that there is currently 50-55 percent participation in the Greek buyback and France managed to sell debt at record low rates – but the true headline for the day was the ECB decision.

We have come to expect the central bank to hold its policy stoically as the financial leaders of the Euro-area try to rein in debts while not strangling growth. That was what opened the market to such surprise for what did occur. While there wasn’t a rate cut (something we discussed yesterday), the policy group did lower its outlook for both growth and inflation.

A projection for 2013 CPI to hit 1.6 percent and 1.4 percent the following year, the key reading is well below target. Add to that the financial stability implications of lowering the 2013 GDP forecast from 0.5 percent growth to 0.3 percent contraction, and we have more than just a concern about a future rate cut (lowering its competitive yield advantage). We have a deeper financial/economic crisis.

British Pound Drops Despite Mum BoE, 1.6000 Break Ahead?
As has become the monthly standard, the Bank of England announced it would leave monetary policy untouched and offered little more in the way of commentary – leaving the market to await the meeting minutes for detail. Normally, we would consider this a non-event, but we did see considerable sterling selling on the day Thursday. There was some unwinding following the hold – likely concern that monetary policy isn’t offsetting austerity to help along the recovery – but most of the decline came prior to that, after the trade deficit jumped to 9.54 billion pounds.

Japanese Yen: Policy Officials Once Again Try to Wrest Attention from Risk
Japanese Economy Minister Maehara tried his hand at revitalizing the yen selloff Friday morning when he said the government would ask the Bank of Japan for "powerful monetary easing" to help drive the yen lower. The comments were noted and promptly ignored by the FX crowd. We have heard from both the DPJ and LDP their intentions to offer economic through a lower yen, but little action has actually been taken so far. The markets have been duped by lackluster efforts in the past, so evidence and action are particularly important to currency traders.

Canadian Dollar: Watch Local Employment Data for Volatility, Parity Chance
We have the best chance to see the USD/CAD hit parity today than anything that we have experienced over the past weeks and months. Consistent with a market that is not prone to serious trends, we should instead look to the combined volatility of the US and Canadian employment figures to spur action from this pair. To carry such a significant rally, we need to see a considerable disappointment on both fronts. A weak Canadian data will spur loonie selling, while a weak US reading would spur the safe have dollar.

Swiss Franc: Watch FX Reserves Data to See How SNB is Positioning
The Swiss franc generally moves in the same direction and with the same momentum as the euro. That is a side effect of a EUR/CHF exchange rate that is held in place by capital flow from mainland Europe to Switzerland and a 1.2000 floor imposed by SNB force. Of course, with the recent bounce, from this exchange rate, the policy authority has seen significant relief from the constant waves. It will be interesting to see in the November FX reserves data whether the bank used this opportunity to lighten its euro holdings on the market to make room for future assaults.