Forex: Dollar Ready to Break…If the NFPs Can Live Up to the Hype

DailyFX

Talking Points:

  • Dollar Ready to Break…If the NFPs Can Live Up to the Hype
  • Euro Finds a Modest Relief Run after ECB Stays its Stimulus Hand
  • British Pound Trouble Growing as Data Misses Mark

Dollar Ready to Break…If the NFPs Can Live Up to the Hype

The stage is set. The US dollar has worked itself into a position where it is easily susceptible to volatility just in time for the December Non-Farm Payrolls (NFPs). Yet, forcing a breakout – much less generating a meaningful trend – may be more difficult than our contrarian readings would insinuate. Looking to volatility measures for the benchmark currency, we find the medium-term FX Volatility Index is hovering at its lowest level since November 20. More specific to the benchmark dollar, the rolling 20-day (one trading month) Average True Range (ATR) on the Dow Jones FXCM Dollar Index (ticker = USDollar) is a sparse 36.3 points. That is the lowest activity level for the currency since May 2002.

Extremes are severe but temporary states. Just as extraordinary periods of volatility settle as they revert back to a historical mean, extreme levels of inactivity beget breakouts and larger price swings. Pairing the current backdrop to one of the most recognizable, market-moving pieces of event risk seems the equivalent of dropping a lit match into dry tinder. Yet, over the past months we have witnessed just how resistant the markets are to returning to ‘normal’. For the December employment data, the watershed moment has already been realized. TheFederal Reserve has already taken the remarkable first step to decelerate its immense QE3 stimulus program at the December 18 FOMC policy meeting. That was the objective that many fundamental traders were trying to ascertain from the labor trends.

Though it is a very early first step, the change in tack by the US central bank is still critical to capital markets and the dollar. If the jobs statistics support expectations of a steady path of belt QE belt-tightening moving forward, it can bolster market rates and thereby raise the dollar’s profile. The more severe impact though would come alongside a tremor of general fear throughout the financial markets. If investors begin to worry about record levels of leverage, exposure to risky assets, low rates of return and tepid participation; liquidity can seize quickly.

Watch the market's reaction to the December NFPs Live as Strategist David Rodriguez covers the data's release in DailyFX-Plus.

Euro Finds a Modest Relief Run after ECB Stays its Stimulus Hand

There was a modest relief move from the euro this past session. Following the record low December Eurozone inflation report on Tuesday and record high unemployment rate the following session, concerns were building. Not only were conditions fading, but this looked very much like an echo of what had happened in November – unfavorable developments in these data series motivated the ECB to cut its benchmark lending rate unexpectedly. Given the ongoing speculation of a stimulus program to follow up on that otherwise, ineffective move; there was some fear / hope that the central bank could introduce a new stimulus-like program at Thursday’s policy meet. Yet, the ECB stayed the course, and President Trichet – though emphatic with his ‘whatever is necessary’ remarks – focused on cuts. This may temper Euro-related stimulus expectations.

British Pound Trouble Growing as Data Misses Mark

There was little surprise to be found in the Bank of England’s (BoE) rate decision outcome. By maintaining the benchmark rate at 0.50 percent and the asset purchase target at £375 Billion, the MPC (Monetary Policy Committee) stayed the course and avoided the need for a statement that would clarify their intentions. Traders expected this. In turn, there is little change to the forecast for the timing of the first rate hike the sterling, which has been a key source of strength for the currency over the past six months. That said, there was another perceptible ‘miss’ in the data. The trade deficit joins the BRC inflation report as another weakening of the rate hike support. This may be a death from a thousand cuts.

Yen Crosses Need BoJ QE Chatter to Reengage Steady Advance

Though equity indexes and other benchmarks for ‘risk trends’ have floundered through the start of the year, the yen crosses don’t necessarily need a full blown appetite for yield to support their advance. In the absence of a drive to carry – even carry as historically thin as we are currently facing – the Japanese yen based crosses still have the BoJ to support their run. The central bank has made a concerted effort to devalue its currency through stimulus. As of late, however, the masses have lost faith or interest. Policy officials need to turn up the QE speculation.

Canadian Dollar Traders Prepare for Volatility with Local and US Jobs Data on Tap

Once again, the focus for North American session trading will be diverted to the US employment statistics. However, loonie traders will have two opportunities to see a sudden swell in volatility. From the NFPs, the market assesses the health of the US economy and general risk trends – an important aspect of the loonie’s health. Yet, the domestic jobs report is the more concentrated potential – especially amid the crosses.

Australian Dollar Shudders but Stable after Chinese Trade Report

The Australian dollar received a quick jolt from the release of Chinese trade data today, but the swell wouldn’t last. The $25.6 billion surplus for December was a retreat from the biggest positive gap in six months. China’s health is particularly important for Australia’s exports, but the country’s own external purchases rose 8.3 percent. Furthermore, the Commerce Ministry pledged 2014 would promote steady import growth.

US Oil Books 8-Month Low as Futures Open Interest Tumbles

The bearish fire continues to burn on oil. The benchmark US futures contract dropped for the seventh time in eight trading sessions and subsequently dropped to an 8-month low on the close. It’s worth noting that open interest on the derivative stands around 1.615 million contracts – nearly the lowest level in a year. Whether speculative or hedge appetite, this is possibly a sign of lasting price relief.

Gold Volatility Near 9-Month Low Just Before NFPs

Talk about complacency…The CBOE’s Gold Volatility reading dropped below 18.5 percent Thursday, hovering at the floor of the eight-month range the measure has maintained since the metal suffered its dramatic collapse below the $1,500 back in April. This would insinuate that there is little risk of heavy swings for the precious metal over the coming three months. Yet, in the forthcoming session, we have a key piece of fundamental data to stir speculation surrounding the pace of the Fed’s stimulus wind down. And, even if this one-off spark fails to hit the mark; the outlook for the commodity’s ‘alternative store of wealth’ is permanently altered. Meanwhile, open interest in the futures space is dangerously close to 5-year lows. Taken in conjunction with the near-12 year low in net speculative long interest, we are looking at a serious change.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

0:01

GBP

BRC Sales Like-For-Like YoY (Dec)

0.8%

0.6%

The print was only negative once in 2013.

5:00

JPY

Leading Index CI (Nov P)

110.8

109.8

The Leading Index figure is currently at 6.5 year highs.

5:00

JPY

Coincident Index (Nov P)

110.6

110.4

6:45

CHF

Unemployment Rate (Dec)

3.40%

3.20%

Switzerland’s unemployment rate has remained below a healthy 3.5% since 2010.

6:45

CHF

Unemployment Rate SA (Dec)

3.20%

3.20%

7:30

EUR

France Bank of France Bus. Sentiment (Dec)

100

101

If the YoY figure here meets expectations, it will be the first positive print since June and only the third since late 2011.

7:45

EUR

France Industrial Production MoM (Nov)

0.5%

-0.3%

7:45

EUR

France Manufacturing Production MoM (Nov)

0.2%

0.4%

8:00

CHF

CPI YoY (Dec)

0.2%

0.1%

Despite strong employment, Switzerland has suffered from deflation since late 2011.

8:00

CHF

CPI EU Harmonized YoY (Dec)

0.2%

9:30

GBP

Industrial Production MoM (Nov)

0.4%

0.4%

MoM est. upped from 0.3% earlier this week. The YoY figure is currently at growth levels not seen since 2010 / early 2011.

9:30

GBP

Industrial Production YoY (Nov)

3.0%

3.2%

9:30

GBP

Manufacturing Production YoY (Nov)

3.3%

2.7%

9:30

GBP

Manufacturing Production MoM (Nov)

0.4%

0.4%

9:30

GBP

Construction Output SA MoM (Nov)

2.2%

The YoY figure is the best since early January 2011.

9:30

GBP

Construction Output SA YoY (Nov)

5.3%

13:30

CAD

Unemployment Rate (Dec)

6.9%

6.9%

Upped from 13.1K est. last week. Canadian data has been weak as of late and a missed print here in addition to better than expected US NFPs may continue to USD/CAD strength.

13:30

CAD

Net Change in Employment (Dec)

14.1K

21.6K

13:30

CAD

Participation Rate (Dec)

66.4

66.4

13:30

USD

Change in Nonfarm Payrolls (Dec)

197K

203K

Following better than expected ADP Employment Figures, NFPs on Friday may help push trends as volatility has remained light ahead of this key release.

13:30

USD

Unemployment Rate (Dec)

7.0%

7.0%

13:30

USD

Underemployment Rate (Dec)

13.2%

13:30

USD

Labor Force Participation Rate (Dec)

63.00%

13:30

USD

Average Hourly Earnings YoY (Dec)

1.90%

2.00%

15:00

USD

IBD/TIPP Economic Optimism (Jan)

43.1

15:00

GBP

NIESR GDP Estimate (Dec)

0.80%

Estimates may have room to the upside as positive data continues out of the U.K..

15:00

USD

Wholesale Inventories MoM (Nov)

0.40%

1.40%

Last month was the highest print since early 2012.

10-15

CNY

Aggregate Financing RMB (Dec)

1200.0B

1230.0B

There is no set time for these releases, although China has a habit of releasing them between Saturday and Sunday. Inflation came in this past week below expectations.

10-15

CNY

Foreign Reserves (Dec)

$3660.0B

10-15

CNY

New Yuan Loans (Dec)

540.0B

624.6B

10-15

CNY

Money Supply M0 YoY (Dec)

7.70%

10-15

CNY

Money Supply M1 YoY (Dec)

9.00%

9.40%

10-15

CNY

Money Supply M2 YoY (Dec)

13.90%

14.20%

GMT

Currency

Upcoming Events & Speeches

18:00

USD

Fed's Bullard Speaks on U.S. Economy in Indianapolis

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT

SCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

13.4800

2.2500

11.8750

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.2400

2.2000

10.7250

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

13.1270

2.1840

10.7668

7.7544

1.2722

Spot

6.5748

5.4941

6.1988

Support 1

12.6000

2.1000

10.2500

7.7490

1.2000

Support 1

6.0800

5.3350

5.7450

Support 2

12.4200

1.7500

9.3700

7.7450

1.1800

Support 2

5.8085

5.2715

5.5655

INTRA-DAY PROBABILITY BANDS 18:00 GMT

CCY

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

Gold

Res 3

1.3681

1.6565

105.91

0.9204

1.0923

0.8969

0.8343

144.00

1252.06

Res 2

1.3655

1.6535

105.65

0.9183

1.0903

0.8947

0.8321

143.60

1245.82

Res 1

1.3630

1.6506

105.38

0.9162

1.0882

0.8925

0.8300

143.20

1239.58

Spot

1.3579

1.6447

104.86

0.9121

1.0842

0.8881

0.8256

142.40

1227.10

Supp 1

1.3528

1.6388

104.34

0.9080

1.0802

0.8837

0.8212

141.60

1214.62

Supp 2

1.3503

1.6359

104.07

0.9059

1.0781

0.8815

0.8191

141.20

1208.38

Supp 3

1.3477

1.6329

103.81

0.9038

1.0761

0.8793

0.8169

140.80

1202.14

v

--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

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