Forex: Dollar Slides Across the Board Ahead of NFPs, EUR/USD Above 1.3600

DailyFX

  • Dollar Slides Across the Board Ahead of NFPs, EUR/USD Above 1.3600
  • Euro Climbs as Rates Rise Alongside LTRO Repayments, But What about the ECB?
  • Japanese Yen on Track for its 12th Consecutive Weekly Rally
  • Australian Dollar Tumbles Slips after Chinese Manufacturing Report
  • Swiss Franc: SNB FX Holdings Hit Record Highs in 4Q Despite EURCHF Lift
  • Canadian Dollar Rallies after GPD Beats Expectations
  • Gold Posts Third Largest Drop this Year on Fading Volume, NFPs Ahead

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Dollar Slides Across the Board Ahead of NFPs, EUR/USD Above 1.3600

There was little fundamental recourse for the dollar this past session. As risk trends stabilized, a momentum-supported EURUSD bull trend led the anti-dollar drive with a close above 1.3600. This is the first time since November 2011 that this benchmark pair has been exposed to these heights. And, given the critical sea change between these two currency’s – one is seeing its central bank balance sheet contract while the other continues to expand – the deliberate move will continue in most conditions that do not spark a wholesale demand for the greenback. That said, the world’s reserve currency was little changed against its other liquid counterparts. For a true dollar recovery, though, we need a catalyst.

The most reliable, bullish ignition for the US dollar would be a wave of risk aversion that sends speculators scrambling from their ‘high’ yield and high risk assets to seek shelter in the world’s reserve currency and asset (Treasuries). Though we have seen EURUSD advance, yen crosses swell and the S&P 500 tread steadily higher; we haven’t seen a committed risk appetite drive in some time. Absent is a significant rise in market returns (reward) alongside a steady or diminishing expectation of volatility (risk). And, while the benchmark for risk trends haven’t reversed course, we are starting to see the early signs lean in that direction. Notably, both the equity and Forex based volatility indexes have climbed from their multi-year lows. Furthermore, junk bond interest (notably low quality, high risk and high yield) has taken a hard drop. This is still a latent threat to change course. We need something that offers a concrete motive to spurn risk. Perhaps Nonfarm Payrolls (NFPs) can provide.

In recent months, the United States’ monthly labor report has elicited limited interest from the market – in other words little volatility and far less trend development. The forthcoming January release will prove just as effective. A sizable deviation is needed to make the monthly payrolls print move the market meaningfully. Instead, there is another aspect to this event risk that will carry heavier influence over speculative interests. Back in December, the Federal Open Market Committee (FOMC) announced that they would buy $85 billion in Treasuries and mortgage backed securities (MBS) until the unemployment rate was expected to hit 6.5 percent and/or inflation returned to 2.5 percent. That jobless rate is our best indication to the pace and longevity of the Fed’s stimulus efforts – a policy that supports risk appetite and lowers US rates (both devaluing the dollar). The unemployment rate is expected to hold at 7.8 percent, so a dip could generate market reactions.

Euro Climbs as Rates Rise Alongside LTRO Repayments, But What about the ECB?

The euro continues to climb against the US dollar and Japanese yen with considerable gusto. Yet, the shared currency gave back ground to its New Zealand and Canadian counterparts this past session. What is the fundamental difference in these performances? For pairs like EURNZD and EURCAD, the yields advantage is far greater for the pairing currency and they’re rate outlooks have both improved recently (more on that below). Alternatively, the US and Japan are under severe easing efforts that bloat the money supply and weigh rates of lower and lower. That gives the Euro a distinct advantage.

From mid-December, the Euro-area’s benchmark market rate (the three-month Euro libor) has risen 26 percent. In reality, the yield spread between the Euro and US has contracted (it’s still in the dollar’s favor) since August. The early LTRO repayments are a critical advantage for the euro – especially over the dollar. Yet, policy officials and the ECB have voiced concern. Would they lower rates to prevent rates’ advance? The probability may be higher than many appreciate, especially after Germany posted a CPI reading of 1.7 percent – a November 2010 low.

Japanese Yen on Track for its 12th Consecutive Weekly RallyThrough Friday morning, USDJPY is up another 1.5 percent. At this pace, the pair will mark an astounding 12 consecutive week rally. However, we can also measure its performance on a different time scale. On a monthly basis, the pair has risen four consecutive months and increased its pace consistently. It is appropriate to regard the pair in this scale because its fundamental crux is competitive stimulus. Will the market realize that it has priced in serious stimulus by the BoJ that won’t take place until next year? Be careful, because a risk aversion move will remind them.

Australian Dollar Tumbles Slips after Chinese Manufacturing Report

With equities floundering in their otherwise impressive advance, the Australian dollar was left open to adverse fundamental developments. On the positive size, the 12-month rate forecast for further easing is near its softest level since August 2011. On the other hand, the economic engine that drives the nation showed a sputter this morning. Though there was a better HSBC version of the report released later, the official manufacturing activity survey for January missed expectations and weighed on export hopes in Australia.

Swiss Franc: SNB FX Holdings Hit Record Highs in 4Q Despite EURCHF Lift

Coming under the radar this past session, the Swiss National Bank reported fourth quarter foreign exchange holdings and its composition. Despite the rise in the EURCHF exchange rate (where much of their attention and intervention effort has been directed) in 4Q, holdings rose to a fresh record of 432.2 billion franc. So perhaps the drop from EURCHF over the past few days in the face of EURUSD advance is unwinding…

Canadian Dollar Rallies after GPD Beats Expectations

Fundamentals aren’t the straightforward drivers that they used to be, but there are still drivers with clout. Though a monthly reading, the Canadian November GDP reading beat expectations and sent USDCAD sliding this past session. The data’s influence has passed, and now the focus for this key pairing will turn back to risk trends and stimulus expectations.

Gold Posts Third Largest Drop this Year on Fading Volume, NFPs Ahead

Despite a relatively reserved trading day for the capital markets, gold managed a 0.8 percent tumble Thursday – its third largest this year – that erased all of the previous day’s gains. In the upcoming session, we have the US employment data. Given the importance of the jobless rate to policymakers, expect gold bugs to be just as studious in interpreting the statistics for stimulus changes as the FX crowd.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

0:30

AUD

Producer Price Index (QoQ)

0.30%

0.60%

Measure of inflation, highly volatile

0:30

AUD

Producer Price Index (YoY)

1.20%

1.10%

Less volatile than QoQ, 3 year low of -1.5% on 12/09

1:00

CNY

Manufacturing PMI

51

50.6

3-year average of 51.9

1:45

CNY

HSBC Manufacturing PMI

52

51.5

Flash PMI at 51.9

5:00

JPY

Vehicle Sales (YoY)

-3.40%

Fallen substantially since a 5-year high of 92% growth on 4/12

5:30

AUD

RBA Commodity Index SDR (YoY)

-8.00%

Early indicator of export price changes, 2-year avg. at 8.2%

5:30

AUD

RBA Commodity Price Index

89.2

Floated below 90 since 7/12

8:30

CHF

SVME-Purchasing Managers Index

50.5

49.5

Shown a negative trend since high of 67.7 on 7/10

8:45

EUR

Italian PMI Manufacturing

47.4

46.7

Shown a negative trend since 5-year high of 59 on 2/11

8:50

EUR

French PMI Manufacturing

42.9

42.9

5-year average of 49.8, high of 57.9 and low of 34.8

8:55

EUR

German PMI Manufacturing

48.8

48.8

Estimated to fall below 3-year average of 53.1, shown decline

9:00

EUR

Euro-Zone PMI Manufacturing

47.5

47.5

Minor increases since 45.4 level on 10/31

9:00

EUR

Italian Unemployment Rate s.a.

11.20%

11.10%

Sharp 5 year increase, 04/07 low of 5.8% to last month high of 11.1%

9:30

GBP

PMI Manufacturing

51

51.4

Remains closer to 5-year high of 51.4, relative to other EU nations

10:00

EUR

Euro-Zone Unemployment Rate

11.90%

11.80%

Steady increase, 5-yr avg.: 9.79%, 3-yr avg.: 10.53%, 1-yr avg.: 11.8%

10:00

EUR

Euro-Zone CPI Estimate (YoY)

2.20%

2.20%

Has not reached or gone above 3% since 11/11, 2yr-avg: 2.6%

13:30

USD

Change in Non-farm Payrolls

165K

155 K

Has remained above 100K since 1 year low of 45 on 6/12

13:30

USD

Unemployment Rate

7.80%

7.80%

Dropped relatively steadily since 3-year high of 9.9% in 4/10

13:30

USD

Underemployment Rate (U6)

14.40%

Remained above 14% since 12/08

13:30

USD

Average Weekly Hours All Employees

34.5

34.5

Previous month third highest level in 5 years, average 34.3

13:30

USD

Average Hourly Earning (YoY) All Employees

2.10%

2.10%

High volatility between 1.5% and 2.5% growth since 8/09

13:58

USD

Markit US PMI Final

55.1

56.1

Has remained above 50 since inception

14:55

USD

U. of Michigan Confidence

71.5

71.3

Remained above 70 since /12, 3-year average 71.8

15:00

USD

Construction Spending (MoM)

0.60%

-0.30%

Decrease in volatility over the last year, low of -0.5% to high of 1.7%

15:00

USD

ISM Manufacturing

50.6

50.7

Trending lower since 5-year high of 59.6 on 2/11

15:00

USD

ISM Prices Paid

56

55.5

Takes into account expectations of future production, new orders, etc.

22:00

USD

Domestic Vehicle Sales

11.9M

11.97M

Strong increase from 5-year low of 6.39M in 2/09

GMT

Currency

Upcoming Events & Speeches

-:-

NZD

RBNZ Governor Wheeler Speaks

13:30

USD

Fed’s Dudley Speaks to New York Bankers Association

14:00

EUR

Bank of Portugal Gov Costa Speaks in Parliament

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 GMTSCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

15.5900

2.0000

9.2080

7.8165

1.3650

Resist 2

7.5800

5.8300

6.1150

Resist 1

15.0000

1.9000

9.1900

7.8075

1.3250

Resist 1

6.8155

5.7350

5.8200

Spot

12.7393

1.7585

8.9699

7.7564

1.2416

Spot

6.3491

5.4829

5.4633

Support 1

12.5000

1.6500

8.5650

7.7490

1.2000

Support 1

6.0800

5.4440

5.5000

Support 2

11.5200

1.5725

6.5575

7.7450

1.1800

Support 2

5.8085

5.3350

5.3040

INTRA-DAY PROBABILITY BANDS 18:00 GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist. 3

1.3717

1.5973

92.96

0.9177

1.0040

1.0492

0.8497

126.85

147.58

Resist. 2

1.3689

1.5945

92.68

0.9158

1.0024

1.0470

0.8477

126.38

147.10

Resist. 1

1.3662

1.5916

92.40

0.9140

1.0008

1.0449

0.8457

125.91

146.62

Spot

1.3607

1.5859

91.85

0.9104

0.9976

1.0407

0.8416

124.98

145.67

Support 1

1.3552

1.5802

91.30

0.9068

0.9944

1.0365

0.8375

124.05

144.71

Support 2

1.3525

1.5773

91.02

0.9050

0.9928

1.0344

0.8355

123.58

144.23

Support 3

1.3497

1.5745

90.74

0.9031

0.9912

1.0322

0.8335

123.11

143.75

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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