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Risk FX Treads Water Ahead of NFPs

Last updated 1/6/2012 5:23 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• Risk sell off in Asia on rumors of N. Korea activity but recovers
• Markets tread water ahead of NFP
• Nikkei off -1.16% Europe up 0.37%
• Oil at $102/bbl
• Gold at $1623/oz.

Overnight Eco

• CHF CPI (MoM) (DEC) -0.2% vs. 0.0%
• EUR Euro-Zone Unemployment (DEC) 10.3% vs. 10.3%
• EUR Euro-Zone Consumer Confidence (DEC F) -0.8% vs. -0.2%
• EUR German Factory Orders s.a. (MoM) (NOV) n/a

Event Risk on Tap

• USD Change in Nonfarm Payrolls (DEC) expected at 150K
• USD Unemployment Rate (DEC) expected at 8.7%
• CAD Net Change in Employment (DEC) expected at 20.0K
• CAD Unemployment Rate (DEC) expected at 7.4%

Price Action

• USD/JPY remains above 77.00 in tight range
• AUD/USD rebounds to 1.0250 after earlier sell of fin Asia
• GBP/USD very quiet at 1.5500
• EUR/USD rallies back to 1.2800 ahead of NFP

The currency market was in its usual pre-NFP stall on the final trading day of the week as high beta FX essentially tread water ahead of the crucial US employment report due at 13:30 GMT. Earlier in the Asian session risk assets came under pressure on rumors that North Korea was moving troops on the border in a possible escalation of tensions with the South. However, both EUR/USD and AUD/USD recovered their footing when the rumors which have been rampant turned out to be false.

On the economic front the European session was extremely quiet with only EZ Retail Sales and Unemployment data on the docket. Retail Sales missed their mark printing at -0.8% versus -0.2% forecast in a further sign that consumer spending continues to be affected by the turmoil in the financial markets in the region. The euro however saw no reaction to the news as traders squared their positions ahead of the NFP report.

Elsewhere Swiss CPI printed cooler than forecast at -0.2% versus 0,0% indicating that the country continues to see deflationary impact  from the strength of the franc, but the Swissie saw no reaction to the news  with EUR/CHF trading in a 10 pip range for most of the European session. The pair remains steady just below the 1.2200 level but it appears unlikely that Swiss officials will be able to raise the peg to 1.2500 given the uncertainly and weakness in the euro.

Turning to the NFPs, as we noted yesterday, “the latest economic data confirms that  US labor markets are clearly improving suggesting that tomorrow's NFP report is likely to beat market expectations of 150K jobs although it may come up short of the most bullish estimates of 200K jobs or more. Seven out of eight key metrics that we track in anticipation of the NFP number have printed better than forecast including today ADP report which registered a gain of 325K versus 175K eyed.  The latest round of US economic data also showed improvement in Consumer confidence to 67.7 from 65.6 projected, ISM Manufacturing employment which printed at 55.1 versus 51.8 and decline in the four week moving average of jobless claims to 371k from 378K forecast.”

There is however a small chance that the headline may slightly miss its mark to the downside. The most important predictor of NFP results - the employment sub component of ISM Services which comprises 70% of the US economy - is showing much more modest gains in job growth. The employment sub component  of ISM Non-Manufacturing increased by only 0.5 points to 49.4 from 48.9 remaining below the key 50 boom/bust line.

The data suggests that the US Service sector may have produced only 45K-50K jobs. Given the fact that it comprises 70% of the US economy such modest gains point to the possibility that the NFP may print only 125K jobs this month.  A slight miss would likely send risk assets lower and push USD/JPY once again towards the 76.50 level on investor disappointment.  

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.