Dollar Faces NFPs, Unresolved Taper Issues, And An 11-Day Range

Dollar Faces NFPs, Unresolved Taper Issues and an 11-Day Range
The Dow Jones FXCM Dollar Index has held a 70-point range for 11 straight trading days. That is a remarkable feat in itself, but it is even more incredible when we consider its risk counterpart – the S&P 500 – has matched its longest decline in 17 months, the VIX volatility index has jumped this past week and the 10-year Treasury yield is again above 2.85 percent. These are individually elements of a dollar rally that have yet to inspire greenback bulls to action. That could be a reason for concern. A market that minimizes encouraging fundamentals is frequently a bearish one. Yet, we are more likely witnessing a situation where traders are simply holding back in anticipation of an event that can unify and charge both risk trends and stimulus expectations – the November labor data.

Ever since the Fed surprised the market by forgoing a Taper decision that was heavily priced in at the September 18 policy meeting, there has been a perceptible bias amongst the speculative ranks to find evidence to support an indefinite postponement. Yet, week-after-week, the argument for a reduction in the $85 billion-per-month QE3 stimulus program has solidified. On the data front, we have seen steady if not outright improvement in the key series. In the October FOMC statement and this week’s Beige Book, the policy group dismissed concerns of fiscal problems spilling over and conspicuously repeated an optimistic economic assessment. Furthermore, individual bank members are repeatedly attempting to separate the Taper from rate hikes, while the cost of stimulus is being given more consideration.

The upcoming labor report is not a definitive signal for a near-term or more distant Taper decision. Rather, this is a big-ticket item that can sway the balance of speculation – arguably a more effective market mover. For splashy headlines and a kneejerk risk response, the NFPs (nonfarm payrolls) number will be the first look. Yet, the real impact comes through the same data that the central bank monitors for its own policy making. The jobless rate – expected to tick down to 7.2 percent – will be the most inclusive data point, though labor force participation and the PCE (the group’s preferred inflation data) will help shape a more complete picture. A trend from the dollar through risk trends and relative stimulus may not become immediately clear Friday as head into the weekend. However, trends often develop in the week following NFPs.

Euro Rallies as Stimulus Deferred at Least a Month
The ECB (European Central Bank) further laid the groundwork for a fresh round of stimulus with its policy decision this past session. And yet, the euro managed to advance against most of its counterparts with a notable 0.5 percent climb for the EUR/USD. Why was the currency not driven lower by the prospects of a balance sheet reversal that would water down yields? Because, it wasn’t happening at this particular gathering. There was inevitably some level of speculation that the central bank was set to follow up on its surprise November rate cut (25 basis points to 0.25 percent) with a move to negative rates or an LSAP (large-scale asset purchase program). As such, there was a measure of ‘relief’. That said, the probability of further accommodation is growing. President Draghi remarked that different programs were again discussed with greater detail as to how they would be implemented. A forecast for inflation to remain below target possibly out until late 2015 is another aspect shaping ‘justification’. Going forward, the level of attention European stimulus attracts will determine the currency’s bearings.

British Pound Loses Ground Despite BoE Hold, Growth Upgrade
The BoE’s (Bank of England) rate decision offered up the opposite outcome to its Eurozone counterpart…and so did the pound. The sterling was down across the board Thursday despite the bank’s avoidance of any tactics to curb building yield expectations or weaken the currency. Fear / hope of a verbal intervention simply wasn’t that prolific. A mum policy group was followed by the August statement from the Exchequer. According to the financial authority, the UK economy was running at a far hotter pace than was expected back when March’s budget was released. The economy was seen growing 1.4 percent this year (previously 0.6) and 2.4 percent in 2014 (previously 1.8). This doesn’t, however, move forward the probability of the first rate hike. The sterling is still exuberant on yield expectations and is exposed to crushed carry dreams.

Japanese Yen: Timing Risk, Taxes, BoJ Stimulus
For other benchmark currencies, the fundamental risks are rather straightforward – the dollar has Taper and pound rate expectations. The yen is materially more complicated with a range of inevitable risks that can easily take the reins. The question is ‘when’? The outlook for a second round BoJ stimulus program before the April consumer tax hike is distant but a constant source of buoyancy. A possible risk trend drive is vague by can be set off at any time. Somewhere in the middle of both scale and timing is the January 1 capital gains tax hike. Though other programs and special circumstances surround this policy move, an index at multi-year highs is prone to fear.

Canadian Dollar Volatility as US and Canadian Jobs Data Due
The docket was a mixed one for Canada Thursday – and so was the loonie’s performance. On one hand, the Ivey business activity report for November tumbled sharply (53.7) while building permits jumped (7.4 percent). The big market mover comes Friday. Both US and Canadian jobs data will carry a short-term and lasting market affect. From NFPs we gauge risk trends and US growth hopes. Locally, it is BoC policy guidance.

Australian and New Zealand Dollars: Where is the Grab for Yield?
In a market that is reaching for whatever yield it can in order to make returns during a central bank-induced period of quiet, it is remarkable that both the New Zealand and Aussie dollar are underperforming. Currently, the rate outlook for the RBNZ (107 bps in 12 months) is the most hawkish in two years. Australian meanwhile is seeing its yield rising now. The 10-year Aussie yield is at an October 2011 high of 4.435 percent.

Gold May Hit a Three-Year Low if Traders Get a Whiff of Taper
As expected, gold would make little effort to upgrade its Wednesday rally into a lasting bull trend. With the European central bank meetings ahead of it at the time and now the November US payrolls, there is little room for speculators to fight prevailing trends with a chance that the Fed will see its Taper decision being made for it in key data. The low June close – the lowest in three years – is $1,200. We are little more than $25 off that level. If the market and financial press arrive at a Taper certainty after the jobs data, we may dive below this key level.