Dollar: Looking Beyond the Flash of NFPs Volatility

Talking Points:

• Dollar: Looking Beyond the Flash of NFPs Volatility
• Euro Traders Confident in Stimulus, Not Concerned Enough About Greece
• British Pound Facing CPI Next Week After a Long Tumble on Rate Forecasts

Dollar: Looking Beyond the Flash of NFPs Volatility

A market that is already prone to volatility and a top market-moving piece of event risk make for a dangerous combination. But, that is what we are heading into with Friday’s session. With the USDollar (Dow Jones FXCM Dollar Index) nudging out a fresh six-year high and the S&P 500 extending its frenzied recovery, the stage is set for the December nonfarm payrolls. The notorious labor report is due at 13:30 GMT and the financial headlines it will generate will no doubt be dramatic. However, the actual market impact this data leverages can be significantly skewed by the fundamental currents that have stirred these past months.

First, it is important to distinguish the two most productive themes this data may tap: Fed rate forecasts (particularly important for the Dollar) and the balance in risk trends. From a monetary policy perspective, it may be difficult to muster serious swings in the majors on the data. Even if both the surface level statistics (NFPs and unemployment) and the more qualitative measures (wage growth and participation rate) weaken, it is working against a well-established trend and sentiment. The improvement in labor conditions has been underway for some years. A downtick in the data is unlikely to project a full-scale economic course change. Furthermore, the rate forecast that the Dollar has enjoyed is buffered. While Economists and FOMC consensus have maintained a ‘mid-2015’ time frame for the first hike, Fed Fund futures and other instruments show the market is trading at a discount to that view. In other words, it’s difficult to disappoint. Also, a nudge in the timing of the first rate hike will not materially downgrade the appeal of a currency whose counterparts (ECB, BoJ) are exceptionally dovish.

Despite the Greenback’s cushion should a disappointing read cross the wires, the bullish response to a robust outcome will likely also be subdued. After a six month rally that has placed the Dollar at the most hawkish extreme of the policy extreme (when compared to its counterparts), there is not a large well of untapped premium for such an outcome. In a similar fashion, an impressive payrolls will likely inspire only so much optimism for ‘risk’ benchmarks like the S&P 500. Just off record highs on the back of a six-year bull trend, there are limitations to the awe a month of jobs data can inspire. That said, a disappointment can wrench a far greater response from equities than it can the Dollar. With volatility building and a global economic slowdown underway, tearing down this trend is a matter of time.

Euro Traders Confidentin Stimulus, Not Concerned Enough About Greece

ECB President Mario Draghi sent a letter to an EU lawmaker Thursday; and in it, the central banker reiterated the group’s readiness to employ a full QE program. He stated that should the low inflation conditions persist “the Governing Council is unanimous in its commitment to using additional unconventional instruments.” With this week’s CPI dropping into negative territory for the first time since the Great Recession, traders have good reason to suspect the ECB will up its game to meet its goal of boosting the balance sheet by €1 trillion. Where stimulus is well accounted for, the risk that Greece poses seems to be treated underestimated. With anti-austerity Syriza still leading the polls, government and central bank officials have repeatedly said funding access depends on keeping good standing with the EU’s rescue guidelines.

British Pound Facing CPI Next Week After a Long Tumble on Rate Forecasts

Short Sterling futures now price the first full BoE rate hike out to December. That reflects a massive drop in rate expectations over the past six months, and the Pound has certainly suffered for it. This past session, the BoE announced no changes to policy, so we await the more detailed minutes - promised as a measure of transparency - in two weeks. Next week, we will be held over by the December inflation data.

Yen Crosses More Market Moving on NFPs than the Dollar?

With a well-established US rate forecast and a significant disparity with its major counterparts on a more dovish footing, the Dollar will likely find a muted response to NFPs. Yet, given the precarious positioning of ‘risk’ with volatility on the rise, Yen crosses may compensate the FX market with big moves. In particular, speculative appetite is at risk of sharp declines and these expensive carry trades are at the top of the list.

Oil: Speculative Interest Swell in ETFs, Not Apparent In Market Price

According to a Bloomberg report, the four largest oil ETPs in the US recorded a massive $1.23 billion inflow of funds in December – the biggest investment in four-and-a-half years. Yet, despite that show of faith, crude prices have offered little sign of recovery. While the more than 50 percent drop in the past seven months has priced in much; global economic winds, risk appetite and supply commitments can push it further.

Emerging Markets, Rubble Rally Ahead of Fed

Heartened by the S&P 500 and developed world markets’ recovery, the Emerging Markets have fought to regain ground. The MSCI’s EEM jumped another 1.7 percent this past session (following a 2.2 percent rally) and most of the asset classes’ currencies gained against the Dollar – including the Ruble up 4.6 percent. Yet, confidence is a fleeting thing for one of the riskiest groupings and the NFPs loom.

Gold Volatility is Falling But Market Setting Up for Break

With the dramatic tumble from capital markets that started the year on ice, gold has seen its questionable haven status tempered before it could progress a meaningful bullish shift. Yet, with recent price action solidifying congestion, a short-term break may soon be at hand. With the NFPs ahead, we have a viable catalyst; but watch the Dollar’s response for guidance before risk trends.

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ECONOMIC DATA

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INTRA-DAY PROBABILITY BANDS 18:00 GMT

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

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