Dollar Faces NFPs and Euro Traders Fret Greece

Talking Points:

• Dollar Looks For Fed Motivation in Today’s NFPs Data
• Euro: Market Devolves into Speculation, Fear as Greece Funds Running Short
• Australian Dollar Tumble Matches a Multi-Decade Record

Dollar Looks For Fed Motivation in Today’s NFPs Data

In the past six-to-nine months, the FX markets have found their direction and motivation through monetary policy. A great example of this influence comes through the late push towards Quantitative Easing (QE) by the ECB, which contrasts dramatically to the Fed’s own stimulus wind down and early conversation on rate hikes. The result of this disparity so far is a 3,500-pip plunge for EURUSD. While the implications of a shift – and divergence – in major monetary policy regimes run far deeper for the global financial system, we don’t need to see the recognition of the systemic risk for the currency market to respond. That engagement and prevailing volatility raises the probability/risk for a strong response from the Dollar to today’s March labor market report. Following the Federal Reserve’s move last month to drop the ‘patient’ language from its statement – seen as a minimum three-month buffer before rate hikes will be considered – the market will grow increasingly sensitive to important updates in data that would hasten or delay the inevitable first hike.

The jobs data today fits the bill of a high-level update that hits upon the key objectives of monetary policy. That said, the most influential highlight of the report is unlikely to be the one that garners the most press. The month-to-month change in the nonfarm payrolls (NFPs) is a speculative favorite across all asset classes and particularly in the media (it’s a big number and easy to understand). However, it is more tailored to churning speculative appetite than dictating monetary policy at this point. And, given that the US markets will be offline (alongside Europe) for the Good Friday holiday; the frenzied ‘risk’ response will be even further deflated. Instead, the focus on actual contributions to timing monetary policy changes will be even more direct. The jobless rate has shown a steady improvement for nearly six years, so a tick (or two) up or down will have limited impact. Inflation is still the missing ingredient; and in this data release, ‘demand-pull’ price growth comes from wage growth.

Euro: Market Devolves into Speculation, Fear as Greece Funds Running Short

Already on tenuous ground, with each day that passes whereby Greece does not unlock the remainder of its bailout funds the Eurozone moves closer to a financial crisis. Though it is clear that the reforms proposed this past weekend were unacceptable, there have been few official statements this week between Greece and its creditors on where the country stands with its negotiations. This has invited speculation and fear as to the state of the situation. Currently, there are (well-founded) concerns that the country will not make its IMF payment next Thursday if it does not also have enough to cover its pension and payroll payments. That said, fear for Greece and contagion risk isn’t nearly high enough.

Australian Dollar Tumble Matches a Multi-Decade Record

With Thursday’s close, AUDUSD marked an incredible 8-day decline. This matches the longest series of losses for the pair in decades. The pain is not unique to the ‘major’ pair, but rather reflects weakness for the Australian Dollar across the board. Explanations are being drawn to sharp declines in iron ore prices. Just like a weak data print, China hiccup or other commodity slip; a weak currency will respond to unfavorable developments. The next big driver on the docket is next week’s RBA decision – swaps price a 75 percent chance of a 25 bp cut.

British Pound a Forgotten Interest Rate Candidate

If we were to rank the major central banks for the probable timing of their first tightening effort on monetary policy, who would fall into second place behind the Fed? The Bank of England. And yet, despite that favorable position on the policy spectrum, the Pound shows little of the unbridled strength that the Dollar has enjoyed. While the first move between Fed and BoE may be separated by months, the timing advantage typically generates more premium than what we see now. If any currency were underpriced for its rate view, it would be the Pound.

Japanese Yen Ready to move If Nikkei Gives, Already Unmoored from BoJ Hope

While the RBA decision is the top central bank listing on the upcoming week’s calendar, the Bank of Japan meeting will carry its own heft. While there is no expected change in policy, the tone for the BoJ’s expansive QQE program has already tempered. Like the market’s response to the Fed’s QE1 and QE2 efforts, we have seen the market utility for the Japanese effort diminish. This is exacerbated by the perceived waver in confidence that a devalued Yen will confer greater benefit – an unspoken objective for the program initially. The Yen is drifting free of QE.

Emerging Markets ETF Hits 2015 High, Real and Ruble Lead Charge in FX

The JPMorgan Emerging Market volatility index has eased this past week. Volatility is the EM’s mortal enemy. The asset group is attractive for its advantaged pace of economic expansion (in good times) and subsequent high rates of return. However, fear quickly diminishes the appetite for pure return – especially when the rates of return are already historically washed by overinvestment in the ‘Great Reach for Yield’. With the financial relief, we find the MSCI EM ETF up another 1.5 percent at a 4-month high. FX hasn’t been left behind. Though the currency field is mixed, the Brazilian Real and Russian Ruble are leading with hefty gains (4.1 and 2.3 percent respectively).

Gold Looks for Fed Patience in Data, Rebound in Speculative Interest

The long-term fundamental backdrop for gold has suffered semi-permanent damage from the reemergence of the Dollar as a liquidity haven (unencumbered by endless QE debasing the fiat). However, the commodity can still gain appeal as the benchmark slips. While the upcoming labor data is unlikely to once again unseat the traditional currency, a disappointing set of data can weigh the metal’s primary pricing. Something else to watch for speculators is the next move amongst futures speculators. Net long COT interest dropped 72 percent in two months.

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