How The NFP Drives Markets

Down almost across the board!
Friday’s disappointing nonfarm payrolls has sent the dollar down almost across the board. This morning it’s lower – considerably lower, in some cases – against all the G10 currencies except the CAD (more on that below). The payroll figure was particularly surprising to the market because the ADP report on Wednesday had exceeded expectations, causing some people to revise up their expectations for payrolls and for the dollar to rise ahead of the figure. The result was amazing volatility when the number came out, which highlights the risk of trading these numbers.
 
The FOMC has said that its decision on whether to continue to reduce its bond purchases every month depends on the data supporting “the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective.” So does this news mean labor market conditions are no longer improving? St. Louis Fed President Bullard said Friday that the Fed expects stronger growth, “which should put additional downward pressure on unemployment.” He said he would be “disinclined to react to one month’s numbers,” especially as the numbers are usually revised. Moreover, he focused on the large decline in the unemployment rate rather the disappointing small rise in the non-farm payrolls. Some analysts tend to view the fall in the unemployment rate as another disappointing indicator in that it was driven largely by a fall in the participation rate, not a rise in employment, but Bullard argued that “today’s labor force participation rate is about right, given observed demographic trends.” If that view is representative of the FOMC’s thinking, then further tapering is almost assured.

Bullard’s comments agree with the view of Wall Street Journal Fed reporter Jon Hilsenrath, who is thought to be close to the thinking of the FOMC. His article following the payrolls report noted that outgoing Chairman Bernanke had strongly suggested that the FOMC would continue to reduce its bond purchases by $10bn a month at each meeting, and Hilsenrath commented that “one weak jobs report–possibly reflecting weather effects, after several weeks of stronger-than-expected economic data on trade and consumer spending and in the face of surprising declines in the unemployment rate–probably won’t alter that calculation.” One thing that could alter the Fed’s thinking though is a substantial decline in inflation. Even Mr. Bullard made that point in his comments. So we have to watch both the employment data and inflation data carefully. My expectation is that they do taper further at the next FOMC meeting on Jan. 28th-29th and the dollar should get some support from that.
 
The big question then is how long does it take for the effects of Friday’s report to wear off and the market start to discount a change in view. Looking at the last six times the NFP figure disappointed the market, there seems no sure pattern – four times EUR/USD was higher a week after the figure, twice it was lower. Two weeks later, it was higher three times and lower three times – a coin toss. Given that there are about two weeks to the FOMC meeting, I’d expect EUR/USD to move higher this week and then lower next week, but that’s just a guess – past performance gives no sure clues. Thursday’s US CPI figure takes on new importance in the light of the disappointing payrolls. If US inflation rises slightly, as it’s expected to, then tapering expectations may recover and USD start recovering as well.
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 CAD was the outlier, falling after Canada’s employment report Friday was even worse than the US’. Unemployment rose to a five-month high of 7.2% from 6.9% (expected: unchanged) and employment fell 46k (expected: +14k) and to make matters worse, Statistics Canada said there was no impact from the weather. Our favorite GBP/CAD trade is going well and we see no reason to change course at the moment. Meanwhile, the fall in USD/JPY was notable – recently it had risen several times even when Tokyo stocks had fallen, and today it’s fallen when Tokyo stocks are up. Is that correlation breaking down? More likely, JPY is moving more in line with the sentiment towards the US than with sentiment towards Japan at the moment. USD/JPY has traded with a 105 handle on four days now this year but has yet to close over that level.

We have a relatively empty calendar ahead of us on Monday with only Italy’s industrial production for November out. It’s forecast to have risen 0.4%, a slowdown from +0.5% in October. The focus will then be on the speech by Atlanta Fed President Dennis Lockhart, who will speak on the U.S. economic outlook. It will be interesting to hear whether he agrees with Bullard that Friday’s payroll figure hasn’t changed his view. If he does, then USD could start recovering earlier than I expect. One person is just a data point; with two points, you can draw a line.

The Market
EUR/USD
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EUR/USD moved higher on Friday after the worse-than-expected US non-farm payrolls. The pair rebounded from the 1.3570 (S2) support barrier, near the longer-term uptrend line (light blue line), and managed to rise above the barrier of 1.3650. This keeps the longer term uptrend intact. The next resistance level is found at 1.3730 (R1), where an upward violation may challenge the key barrier at 1.3810 (R2). Only a break below the 1.3525 (S3) will argue that the long-term uptrend has probably reached its end.

Support: 1.3650 (S1), 1.3570 (S2), 1.3525 (S3).

Resistance: 1.3730 (R1), 1.3810 (R2), 1.3893 (R3).
EUR/JPY
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EUR/JPY moved lower on Friday after finding resistance for a third time at the 143.15 (R1) barrier. The 200-period moving average remains near the 140.88 (S1) support, thus a downward break of that area may have larger bearish implications. On the other hand, a rebound near that area may target once again the highs of 145.00 (R2). The MACD oscillator, already negative, crossed below its trigger line, indicating bearish momentum for the price action. On the daily and weekly charts the longer term uptrend is still intact, thus I would consider any short-term decline as a retracement of the long-term upward path.

Support: 140.88 (S1), 139.67 (S2), 138.00 (S3).

Resistance: 143.15 (R1), 145.00 (R2), 147.00 (R3).
GBP/USD
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GBP/USD continued moving higher and after the miss on the US non-farm payrolls figure, managed to overcome the hurdle of 1.6465. I would expect the rate to move higher and challenge once again the highs of 1.6600 (R1). A dip below 1.6335 (S2) is needed to turn the short-term picture negative. As long as the rate is trading above both the moving averages and the blue support line, the picture of cable remains positive. My only concern is that on the daily chart, we can identify negative divergence between the daily MACD and the price action. This suggests that the longer-term uptrend is losing momentum for now.

Support: 1.6465 (S1), 1.6335 (S2), 1.6260 (S3).

Resistance: 1.6600 (R1), 1.6735 (R2), 1.6885 (R3).
Gold

Gold continued its advance on Friday and reached the resistance level of 1251 (R1). At the time of writing, the precious metal is testing that hurdle and if the longs are strong enough to overcome it, I would expect them to target the next resistance at 1268 (R2). The 50-period moving average is getting closer to the 200-period moving average and a bullish cross in the near future may increase the probabilities for further advance. The RSI seems ready to exit its overbought zone, thus a pullback before the bulls prevail again cannot be ruled out. On the daily and weekly charts, the longer-term downtrend remains in effect, and as a result I would consider any short-term advance as a retracement of the major downward path, for now.

Support: 1224 (S1), 1187 (S2), 1155 (S3).

Resistance: 1251 (R1), 1268 (R2), 1290 (R3).
Oil

WTI moved in a consolidative mode, remaining slightly above the key barrier of 92.00 (S1). I remain neutral on WTI until we have a clearer picture for its next directional path. The last time WTI rebounded from 92.00 (S1), the price rallied towards 97.25 (R3). Nonetheless, if the 92.00 (S1) level fails to hold this time, we may experience extensions towards the next support barrier at 90.15 (S2). The 50-period moving average lies below the 200-peroid moving average, keeping the outlook of the oil negative at the moment.

Support: 92.00 (S1), 90.15 (S2), 87.85 (S3).

Resistance: 94.00 (R1), 95.35 (R2), 97.25 (R3).
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