Dollar Posts Biggest Rally in a Year Ahead of NFPs

Talking Points:

Dollar Posts Biggest Rally in a Year Ahead of NFPs
Euro Collapses After ECB’s Draghi Announces Rate Cuts, Stimulus
Yen Crosses: USDJPY Hits 6-Year High but Can it Continue?

Having rallied for seven straight weeks, the Dow Jones FXCM Dollar Index (ticker = USDollar) has won another impressive title this past session: the biggest single-day rally in 12 months. Looking for the motivation currency’s motivation, the docket was loaded with supporting event risk. Reflecting on a strong economy, the ISM service sector survey for August showed its strongest growth in 9 years, the RBC consumer outlook index hit a 7-year high, the Markit’s PMI figures unexpectedly improved and the trade deficit narrowed to its smallest shortfall in six months. Less inspiring ahead of August payrolls, ADP jobs change printed modestly under the 220,000-person consensus with 204,000 jobs added.

All of this local data stirred the dollar’s fundamental currents, but the heft seems to have originated from the currency’s benchmark counterparts. In particular, the European currencies were hammered this past session following the policy easing by the ECB. EURUSD dropped an incredible 1.6 percent – the biggest drop since November 2011. Caught in the Euro’s gravity, the dollar advanced 1.5 percent versus the Swiss Franc and wrestled 0.8 percent away from the British Pound. When the FX market’s second most liquid currency suffers such a colossal loss, there are few outlets other than the greenback. Then again, if there is a correction in the works – the dollar is just as exposed.

Moving into the final trading session of the week, responsibility for the EURUSD’s next move likely falls back to the dollar. On tap, we have August Nonfarm Payrolls. The level of surprise relative to the 230,000 additional jobs that is currently the consensus can generate heat. However, to truly feed or reverse a trend; the ‘qualitative’ factors need to contribute. The jobless rate, the participation rate and earnings growth are all key readings for the Fed’s timing for monetary policy; so that it was we should watch.

Euro Collapses After ECB’s Draghi Announces Rate Cuts, Stimulus

While there was a considerable level of speculation surrounding further support coming from the European Central Bank (ECB) through the second half of 2014 – most did not expect a considerable upgrade so soon after the June easing effort. That much was apparent by the Euro’s reaction to the announcement of a further 20 basis point cut to the group’s main three interest rates and confirmation of a program to purchase asset-backed securities and covered bonds. Details of the plan will reportedly come after the October policy meeting, which makes the notice at this meeting seem rushed. ECB President Draghi did mention that the aim would be to return the central bank’s balance sheet back to the level it was at towards the beginning of 2012 (€2.7 trillion at the start of the year versus a June 2012 peak of €3.1 trillion and current €2.0 trillion holding). While the BoJ and Fed stimulus programs may still be larger, the ECB is implementing the most dovish change.

Yen Crosses: USDJPY Hits 6-Year High but Can it Continue?

The Yen crosses performance was a mixed bag Thursday. On the one hand, European currency-based pairings were in the red. Otherwise, there were notable gains. This alone can act as a good measure of how influential the ECB’s monetary policy was on local currency manipulation versus how inspiring it was for general risk appetite. In the fray, USDJPY this morning pushed to six-year highs; but seems uncertain of follow through. Even with Japan’s Aso talking about stimulus, these pairs seem to still be following ‘risk trends’.

British Pound’s Sympathy Pains Turn to More Direct Rate Speculation

The British Pound suffered mightily this past session even though it didn’t have any meaningful event risk crossing the tapes. The Bank of England’s (BoE) rate decision was a non-event – especially compared to the ECB – as the central bank doesn’t offer context nor forecast when there are no changes to its main policy efforts. Instead, the Sterling followed the lead of the Euro – perhaps with traders worried the economic malaise could spread and further curb the BoE’s first hike. Ahead, we have data distinctly influential to the UK and BoE: inflation forecasts.

Swiss Franc: The Onus is Now on the SNB

Your move Swiss National Bank. The ECB’s latest wave of easing is directed at helping to stabilize the Eurozone’s economy and encourage inflation, but it undoubtedly will incur collateral damage. The EURCHF exchange rate will be one of the unfortunate side effects. With the Euro being effectively devalued by the additional easing, the exchange rate will be further pressured towards 1.2000 – a floor that the SNB is attempting to hold as part of its own policy regime. Will the central bank simply wait until tested or will they attempt to head it off?

Emerging Market’s Derive Little Hope in ECB’s Dive into Open Stimulus

It used to be that a large stimulus program from one of the largest central banks in the world was occasion for fresh risk taking. That doesn’t seem to be the case with ECB’s latest promise. A ‘risk’ benchmark, the Emerging Markets were uninspired with the MSCI ETF down 0.3 percent this past session and most currencies in the group under water. Notably, the lower liquidity EM currencies suffered the most.

Gold Drops Despite Second Largest Currency Being Devalued

Another bygone benefactor of net stimulus increases, gold was similarly struggling to gain traction on the diminished value of a major currency. Despite the material drop in the value of the Euro in response to the ECB’s rate cuts and stimulus, the ‘alternative to traditional fiat’ failed to gain traction outside the direct relationship to the European currencies. A drop in the value of the Euro was readily balanced by a gain in value for the Dollar – keeping the value in FX. However, if the Fed outlook softens on NFPs; a drop in the top two FX players may squeeze it higher.

**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Comments