Talking Points:

Dollar Traders Ready for Heavy Swings as NFPs Shape Taper Fears
Japanese Yen Crosses the High Water Mark for NFPs, Taper, Risk Trends
Euro Drops after ECB’s Draghi Keeps Rate Cut Option

Dollar Traders Ready for Heavy Swings as NFPs Shape Taper Fears
We are making the final pass before the Federal Reserve decides in less than two weeks whether to Taper or not. A reduction in support for the markets seems the consensus, but some markets – the most exposed and leveraged – have attempted to hold back the tide. That resistance could very well collapse should the upcoming August employment figures finally undermine the complacency and expose blatant risks. And so, with the upcoming nonfarm payrolls (NFPs), traders must take close stock of whether the market is tipping into the extremes of sentiment. To gauge there are many assets that can act as barometers but few as effectively as the USDollar and S&P 500.

As a simple gauge of how influential the US labor data has become, we only need to look back at the August 2nd release of the July NFP figures. While US equities were relatively restrained for volatility that day, it would call the top and instigated the month-long bear leg the asset class currently finds itself in. Why the tide change without the immediate volatility impact? Speculators often follow the payrolls release which missed the forecast. Yet, the aspect that mattered to Fed policy was the sharper-than-expected drop in the jobless rate. That same dynamic exists with this event, but the loud countdown to the FOMC rate decision and the erosion in other yield-sensitive assets in the past weeks will only intensify the reaction.

The Bloomberg economist consensus heading into the data release is for an 180,000 net increase in payrolls and a hold in the jobless rate at 7.4 percent. A larger jump in the number of new jobs and/or a downtick in the percentage of Americans in the labor force without jobs would be considered further support for a reduction of QE3 this month. The combination of both would be the most influential and thereby offer the clearest signal the greatest portion of the market – thereby encouraging a broader deleveraging of risky exposure. For the antithesis outcome of weaker data, the reaction is unlikely to be as encouraging for bullish risk interests. It would take a severe curb on the data to put off Taper speculation. Yet, under that scenario; while equities may not charge aggressively higher, the dollar could suffer. The grey area is where we likely end though. It is important to remember that status quo is a path towards easing support that has encouraged profligacy.

Japanese Yen Crosses the High Water Mark for NFPs, Taper, Risk Trends
While it is easier to draw connections between the US dollar and NFPs, the Japanese yen crosses are arguably better suited to gauging the intensity level of global investor sentiment in the wake the data. The yen crosses still extraordinarily buoyant from the Bank of Japan’s big stimulus influx earlier this year while the capital markets enjoyed a disarming period of complacency. Those were ideal conditions for the market to reach for whatever yield it could find, and the yen crosses further sporting an accelerant by the BoJ’s efforts were ideal positioning. Yet, the aggressive capital appreciation made for ‘expensive’ exchange rates when the actual yield on these carry trades is at record lows in some cases. If the risk aversion theme is heavy enough to offset the constant pressure by the BoJ, it would be a signal of fervent risk aversion.

Euro Drops after ECB’s Draghi Keeps Rate Cut Option
The euro dropped against most of its counterparts this past session – though not for the most fundamentally disturbing reasons. After the European Central Bank deliberations, Governor Mario Draghi remarked that the group is still holding out further rate cuts as an option should market yields reach ‘unwarranted’ levels. Such a move would do little to stabilize financial market conditions but it would further push the euro’s eventual return to higher rates down the line behind its counterparts. Meanwhile, a receding tide of counterfeit optimism can expose serious issues in the Eurozone. Italy’sfragile coalition government, Cyprus voting down policy needed for its rescue and Greece bailout number three are issues that pose very real trouble to the region’s recovery effort.

British Pound: BoE Governor Carney Quiet Despite Gilts Breaking 3%It came as little surprise that the Bank of England (BoE) left its policy untouched this past session. Rates and the bond purchase program have passed untouched for some time, while forward guidance is brand new and needs time to influence investors’ and consumers’ behavior. What was somewhat disconcerting for sterling traders though was the lack of commentary by Governor Carney. It seems he will extend the traditional of remaining mum on no changes, but that is a concern with the market doubts his assurances on low rates as gilts show.

Canadian Dollar: Don’t Forget about Canadian Jobs Figures
Perhaps the most fundamentally at-risk currency amongst the majors heading into Friday is the Canadian dollar. As the United States’ largest trade partner, Canada will fill feel the direct economic repercussions of an improved or deteriorating US labor market. Beyond that, the loonie is considered an ‘investment’ currency alternative and thereby will respond to any changes in the backdrop of risk appetite. Yet, that isn’t all. The country’s own August employment statistics are due. This could be a complicated position to maintain.

Emerging Markets: Rupee, Real and Ruble Recovery at Immediate Risk
The most at-risk of the emerging market currencies over the past weeks have stabilized. The Reserve Bank of India’s new reforms have helped cool the Rupee, Brazil’s FX intervention fund has curbed speculative shorts and Russian President Putin’s vow to stabilize exchange rates has leveled out the ruble. However, this moment of tranquility is truly founded as a side effect of a market that is distracted by possible market-wide volatility in Friday’s NFPs. If the flight to quality is revived, the efforts to calm the EMs will quickly fall apart.

Gold Suffers a Preemptive Tumble Ahead of NFPs
Is gold telling us something of the speculative crowds concerns that traditional capital markets are too timid to adjust for? The precious metal made a serious dive Thursday to crash through $1,385 support on a 1.7 percent drop – the biggest in two months. This is remarkable because this metal holds a significant role as an alternative to other safe haven assets that are considered manipulated by monetary policy (dollars, Treasuries, money markets, etc). If stimulus – not just that in the US – were expected to build at a consistent pace over time, it would lift the metal. A revived dollar as stimulus is wound down though would hurt gold. Alternatively, a full financial crisis may perk gold back up.

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

ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

5:00

JPY

Leading Index (JUL P)

107.9

107.2

Last month was the first decline in the leading index of the year.