Dollar at Risk of Sharp Reversal Given the Wrong NFP Step

Talking Points:

Dollar at Risk of Sharp Reversal Given the Wrong NFP Step
Euro: How Much Worse Can Things Get?
British Pound Unmoved by BoE Decision, But Next’ Report Will Hit

Technical traders recognize the Dollar is in an ominously risky position: leaning heavily on an exaggeratedly-consistent, seven-month rising bull trend just before January NFPs is due. The Greenback’s climb has been lurid and blatant these past months, though it was well founded. Against a wave of downgraded economic forecasts and softened monetary policy for its largest peers, the outlook for the US economy looks comparatively robust while the Fed has moved unwaveringly towards a first rate hike. So, while the Dollar doesn’t present the incredible return potential as it had during cycle peaks in past decades, the market was funneled its way because of its ‘relative’ appeal. That said, a modest comparative return will be sensitive to change and no market moves in a straight line forever. Against a mature trend and growing claims of a ‘one-sided’ bet (speculative futures interest has soared to a record long), the risk from the payrolls is more significant to the downside.

From the labor report, there are two divisions that need to be accounted for to gauge impact: time frame and theme. For the former, all event risk can have a short-term (volatility) impact and lasting trend contribution. Given the technical pressure in the market and the abundance of worrying headlines, this release can prove a spark. And, the most readily understood and heavily publicized datum from the suite is the nonfarm payrolls. For trend implications, the measures that change the trajectory of growth and rate forecasts are critical. The unemployment rate is a common reference in policy decisions, but the wage inflation measure may prove the crux of the Fed’s timing moving forward as it is the upstream inflation pressure. Perhaps even more important than separating the immediate and lasting impact of the data is establishing what ‘theme’ is most impelled. Interest rate expectations have proven a key driver for the Dollar, and this data can fuel that speculation…for better or worse. Yet, given how disparate the Fed view already is, the risk is much heavier for ‘disappointment’ – even though we are unlikely to see the outlook turn from ‘hawkish’ to ‘dovish’. Arguably the most vulnerable dynamic in this event risk though is sentiment. Equities remain at nosebleed levels despite a troubled outlook. Would a slowing US economy or the reality of a Fed removing accommodation pose more risk?

Euro: How Much Worse Can Things Get?

‘How much worse can things get for the Eurozone.’ That is the question many investors, lawmakers and citizens are asking themselves. Growth and unemployment forecasts are painful but they have started to tick higher. The loud ticking on Greece’s debt standoff clock grew louder after the ECB removed its waiver on liquidity lines, but there is room to compromise. And, of course, there is a sizable stimulus effort due to power up at the beginning of next month. The reality of the situation though is that conditions can worsen. Stimulus vows can fail to generate growth, prevent sovereign contagion and stabilize financial tremors that originate outside of the region. So, even in the event of a relief rally, the clouds may not fully lift. Next week, the focus remains on Greece and the Euro-area’s 4Q GDP data will be top ‘traditional’ event risk.

British Pound Unmoved by BoE Decision, But Next’ Report Will Hit

It comes as little surprise that the Bank of England rate decision Thursday would generate little clarity on the policy group’s intentions for the future – if there is no change in rates or unorthodox programs, they offer no insight. In contrast, next week’s BoE Quarterly Inflation Report is the high water mark for insight on rate expectations. Over the past months, hopes for a near-term rate hike have all but vanished and a full 25 bps of tightening has even been pushed into 2016. The dovish conviction may be overdone. It wouldn’t take much to shake the shorts up.

Canadian Dollar Will Trade Counterparty Catalyst for Local Employment Data

Depending on what currency pair we are looking at, the Canadian dollar is frequently strong armed by a more active counterpart (USDCAD) or adapted to an offshoot theme (CADJPY for risk sensitivity). From Friday’s docket though we will see a capable, inherent market mover for the Loonie in the Canadian employment data. The BoC’s surprise rate cut at its last meeting will shade the market’s read on the data.

Oil’s Extreme Volatility Temporary Dislocation or the Future for Other Markets?

Volatility has grown for most asset classes since the middle of last year. Yet, no benchmark market has seen the kind of extreme activity that oil has. This past session, the active US-based WTI crude oil future contract rallied 4.2 percent. That followed an astounding 8.7 percent tumble. The CBOE’s oil volatility index is currently 63.1 percent. That is the highest level for the series in nearly six years and a significant premium over most other assets (equities, FX and fixed income). So, is this a temporary digression from or the path for other markets?

Emerging Markets: Risk Trends, Ukraine, Global Stimulus Concerns Surprisingly Low

Emerging Market capital asset benchmarks have taken a mixed road. Though they have recovered these past weeks, there seems little conviction to keep funds from moving in. The menace of risk trends and monetary policy distortions (both easing and then withdrawal) feed unease. So while issues like Ukraine, stimulus tides and quick drops on various risk assets seem to be weathered; fear is building.

Gold: Low Yield and a Hobbled Dollar Would Go a Long Way

Like many other well-trodden markets, gold has worked itself into a terminal range – one that inevitably must end in a move either higher or lower. What direction we take depends a lot on how effective the upcoming NFPs data is. If the Dollar stumbles on the back of tempered rate forecasts, the metal’s pricing instrument will be devalued and global yields will ease (making a cash asset like gold a little more appealing). Demand has recently soared amongst both speculative futures and ETF interests. Will they find reason to keep building?

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