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THE STORIES IN THE CURRENCY MARKET

• U.S. DOLLAR: HOW TO TRADE NON-FARM PAYROLLS
• EUR/USD: HIT BY WEAKER ECONOMIC DATA
• GBP/USD: NO SURPRISES FROM BOE
• USD/CAD: MANUFACTURING ACTIVITY CONTRACTS
• AUD/USD: SHARP INCREASE IN RETAIL SALES, TRADE DEFICIT NARROWS
• NZD/USD: GOLD AND OIL PRICES FALL
• USD/JPY: YEN HIT BY KAN COMMENTS

EXPECTATIONS FOR UPCOMING FED MEETINGS

CURRENT US INTEREST RATE: 0.25%
	1/27 Meeting	3/16 Meeting
NO CHANGE	56.0%	54.1%
Cut to 0.00%	44.0%	37.2%
Increase to 0.50%	0.0%	8.7%
Increase to 0.75%	0.0%	0.0%

U.S. DOLLAR: HOW TO TRADE NON-FARM PAYROLLS

Nominate @fx360 for a Shorty Award in Finance Content- THANKS! http://shortyawards.com/category/finance NFP Preview: 3 Reasons Why Job Growth is Possible .

Currency to Trade: USD/JPY

The non-farm payrolls report typically creates heightened volatility in the foreign exchange market. We usually recommend that forex traders stand aside and not trade, but if you insist on trading the payrolls report, the best currency pair to use is USD/JPY because the EUR/USD& #8217;s reaction to the NFP release tends to be distorted by the dueling forces of fundamentals and risk appetite. The 3 most likely scenarios for payrolls are the following:

Foreign exchange traders bid up U.S. dollars ahead of Friday’s non-farm payrolls report. Given last month’s reaction to the surprisingly strong NFP number and the market’s expectations for another monthly improvement in the labor market, it is not entirely surprising to see the dollar strengthen against every major currency. Demand for dollars was so strong today that the greenback reached a 4 month high against the Japanese Yen on an intraday basis. The dollar’s ability to sustain its gains going forward will largely depend on Friday’s non-farm payrolls report. Nearly every labor market indicator including this morning’s jobless claims release suggests that there will be an improvement in NFPs – the only question is, by how much. Also, currency traders are much more interested in how the dollar will react following the release and therefore, we are focusing our discussion on how to trade non-farm payrolls. For our NFP Preview, read NFP Preview: 3 Reasons Why Job Growth is Possible .

1. Dec Payrolls Flat or Positive, No Major Revisions in Nov - Bullish for USD/JPY

The market expects zero to positive payrolls with no major revisions to the November numbers. In this scenario, the dollar should rally against the Japanese Yen and sustain its gains throughout the day. The size of the rally is of course contingent upon the degree of job growth. If there was no job growth last month, the rally could be modest but if job growth exceeds 25k, USD/JPY could test 95.

2. Dec Payrolls Negative, No Major Revisions in Nov - Bearish for USD/JPY

If job losses continue for the 24th consecutive month, it would be a big disappointment for the financial markets. Depending upon the degree of job losses, stocks will most likely give up their gains and the dollar would weaken against the Japanese Yen. More specifically, if job losses are less than 20k, the sell-off in the dollar should be modest but if job losses are more than 20k, the sell-off in USD/JPY could be more severe.

3. December Payrolls Negative Downward Revisions to November Numbers > Bearish for USD/JPY

Negative December payrolls along with a big downward revision to the November numbers are the most significant risks for tomorrow’s NFP report. The only reason why some economists are predicting job growth for December is because even a marginal improvement from last month’s reports puts NFPs into positive territory. But the labor market could still improve if there is a big downward revision to the November data and smaller job losses in December. This would be the worst case scenario for the dollar because it would erase all of the built up optimism following last month’s report.

Fed Tells Banks to Prepare for Rate Hikes

Interestingly enough, the dollar barely reacted to the Federal Reserve’s warning for banks to guard against the risk of rising interest rates. More specifically, they wanted banks to be aware of possible losses that could stem from interest rates moving up from their currently low levels and encouraged them to reduce exposure or raise capital. Regulators told banks to run stress tests with scenarios including “instantaneous and significant changes” including a rise of as much as 400bp. There is no question that the Fed is trying to prepare the markets for a rate hike but perhaps the lack of a timeframe has limited the dollar’s reaction to the announcement.

EUR/USD: HIT BY WEAKER ECONOMIC DATA

The euro ended the NY trading session lower against the U.S. dollar in the face of weaker economic data and position adjustments ahead of Non-Farm Payrolls. Despite an improvement in the labor market, German retail sales plunged 1.1 percent in the month of November due to weaker demand abroad. Sales of new cars also fell for the first time in 11 months as incentives fade. The decline in consumer spending in the largest country within the Eurozone caused retail sales in the region as a whole to drop by 1.2 percent. The increase in German factory orders also fell short of market expectations. The forecast called for 1.5 percent increase in orders but instead, they rose by a measly 0.2 percent. Yet sentiment across the region has held steady. According to the latest confidence numbers, both consumers and businesses have grown less pessimistic. Although it has been a volatile week for the EUR/USD, taking a step back, the currency pair has basically remained within a 225 pip range since December 24th. Previously, the euro was sold on concerns about the fiscal health of European nations but now that those fears have subsided, traders are waiting for the next big surprise which we expect to come from tomorrow’s NFP report. Given the market movingness of the U.S. labor market data, we expect the EUR/USD to break its 2 week range. Meanwhile EUR/CHF continued to grind lower, reaching 1.4766 on an intraday basis. Consumer prices declined in the month of December indicating weak inflationary pressures in Switzerland. So far, there have been no signs of the Swiss National Bank in the market – perhaps they are waiting for EUR/CHF to retest 1.46, which was the level that they intervened in March. Swiss employment numbers are due for release tomorrow and the jobless rate is expected to rise.

GBP/USD: NO SURPRISES FROM BOE

As expected, the Bank of England left interest rates unchanged at 0.5 percent and the size of their asset purchase program at GBP200 billion. The British pound did not react to the announcement but ended the day lower against the U.S. dollar and higher against the euro. The next big decision by the Monetary Policy Committee will be made in February when the Quarterly Inflation report is released. The current asset purchase program is set to end in January. Depending upon how the next few weeks of economic data fares, the Bank of England could either extend and increase the program, or draw it to a close. Either way, next month’s meeting should be far more interesting than this month’s. One of the reasons why the BoE may not increase stimulus is inflation. Producer prices are due for release tomorrow and based upon the rise in oil prices and price pressures reported in the service and manufacturing PMI reports, there is a good chance that inflation accelerated. Aside from the BoE announcement, Halifax reported yet another month of higher house prices. The fifth straight monthly increase indicates that the housing market remains one of the healthiest parts of the U.K. economy.

USD/CAD: MANUFACTURING ACTIVITY CONTRACTS

The Canadian, Australian and New Zealand dollars all fell under the pressure of broad dollar weakness despite mixed economic data. In Canada, the IVEY PMI report on manufacturing conditions dropped from 55.9 to 48.4, the lowest level since May 2009. The contraction in manufacturing activity caught the market by surprise and sent the loonie tumbling against the U.S. dollar. However the details of the report were not nearly as ugly as the headline number because the employment and inventory subcomponents increased. Canadian employment numbers are due for release tomorrow but the conflicting IVEY PMI headline and employment numbers make the employment forecast a difficult call. We believe that the odds are skewed slightly more towards a weaker number than a stronger one. Meanwhile Australian economic data was very strong with retail sales rising 1.4 percent in November and the trade deficit narrowing to the lowest level since June. The improvement in the labor market and a strong recovery has helped to fuel demand in Australia - construction sector PMI is due for release tomorrow.

USD/JPY: YEN HIT BY KAN COMMENTS

The Japanese Yen weakened across the board after Japan’s new Finance Minister threw his support behind a weaker Yen. Last night, Naoto Kan said “it would be nice for Yen to weaken a bit further,” "Many businesses think USD/JPY around mid-90s (which means around 95 yen) is appropriate", and "Will cooperate with BoJ to guide yen to proper level". One of the biggest questions that we had when Kan was assigned to the post was his stance on currency intervention and he did not waste any time to let the market know that he favors yen weakness over yen strength. It remains to be seen whether this will change the Ministry of Finance’s intervention policy because part of Kan’s motivation in making such a statement is to avoid triggering the type of volatility and criticism that former Finance Minister Fujii felt when he said he favored a stronger Yen. Leading indicators are due for release tomorrow from Japan and the market expects stronger numbers which would indicate that the economy is improving.

USD/JPY: Currency in Play for Next 24 Hours

USD/JPY will be the currency pair in play for tomorrow. Japanese Leading Index and Coincident Index are due for release at 5:00GMT or 12:00AM EST. The U.S. will release Non-farm payrolls along with unemployment rate at 13:30GMT or 8:30AM EST. Over a course of the past month, USD/JPY staged a dramatic rally pushing the currency pair into the Buy Zone established through Bollinger Bands. However the currency pair is closing in on a key resistance level of 93.40, provided by the 200-day SMA, which is also hovering right above today’s high. If the pair manages to clear the level the next area of resistance would be the psychologically important 95.00 threshold. Yet should the pair lose its current momentum and simultaneously come out of the Buy Zone if it breaks the support located at 92.20.

About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.