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Dollar: Turning To Leading Indicators For NFP

Last updated 3/2/2010 5:34 PM ET (GMT -5) 3 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• DOLLAR: TURNING TO LEADING INDICATORS FOR NFP
• EUR/USD: ATTEMPTING TO BOTTOM?
• GBP/USD: STILL HEADED LOWER
• USD/CAD: HAWKISH COMMENTS FROM BOC
• AUD/USD: RBA RAISES RATES, GDP UP NEXT
• NZD/USD: GOLD AND OIL PRICES UNCHANGED
• USD/JPY: IMF PUSHES CHINA FOR REVALUATION

EXPECTATIONS FOR UPCOMING FED MEETINGS

DOLLAR: TURNING TO LEADING INDICATORS FOR NFP

Once again, it was relative growth and not risk appetite that dominated the flows in the forex market.  With lackluster price action in the equities and bonds, risk was clearly not the focus.  Even though there was no U.S. economic data on the calendar today, there were plenty of non-dollar centric events for currency traders to key off of.  The euro, Australian and Canadian dollars strengthened against the greenback thanks to the rate hike in Australia and hawkish comments from Canadian policy makers.  The euro stabilized as Greece prepares to announce another round of deficit cuts tomorrow.  The British pound on the other hand fell for the tenth consecutive trading while the call for more Chinese Yuan revaluation by the IMF pushed the Yen higher against the dollar.  

Leading Indicators for Non-Farm Payrolls

However the dynamics driving the forex market begin to change tomorrow when traders start to turn its focus to the U.S. non-farm payrolls report.  The leading indicators for NFPs are due for release on Wednesday.  They include the Challenger Layoff report, the ADP Employment report and non-manufacturing ISM.  Long time readers of FX360.com will know that the employment component of service sector ISM is a very strong leading indicator for non-farm payrolls.  A decline in the employment component of the ISM report will exacerbate the speculation that job losses accelerated last month while an improvement will only make things more confusing because the rise in jobless claims have been pointing to a drop in NFP.  This week’s U.S. economic reports are very important because they provide a more updated look at the U.S. economy.  The Federal Reserve has grown more hawkish and even raised the discount rate last month.  The latest economic figures will help traders decide whether the U.S. central bank will follow up with another normalization move at their March 16th meeting.  The Beige Book is also due for release tomorrow and it is always important to pay attention to this report because it can provide additional details on the outlook for the labor market and consumer spending.  However the NFP report may not have the market’s undivided attention until Thursday afternoon.  There are still 2 more central bank rate decisions on Thursday (ECB and BoE) and the new austerity package from Greece tomorrow.  

VIX Trades at Lowest Level since January

It is also worth noting that the VIX which measures the volatility in equity markets traded at the lowest level since late January.  Low volatility is usually positive for risk which should have fueled gains in equities and high yielding currency pairs.  However the flat price action in stocks and the drop in the Yen crosses suggests that either the VIX is wrong and volatility is about to explode or currencies are due for a risk rally.  

EUR/USD: ATTEMPTING TO BOTTOM?

We all know that when sentiment is at an extreme point, it never takes much to tip things the other way.  This seems to be the fate of the euro which rallied against the U.S. dollar despite the Eurozone’s bleak economic outlook.  Over the past 2 weeks, the price action of the EUR/USD suggests that the currency pair is attempting to bottom.  Although it fell to a fresh yearly low of 1.3434 during the early European trading session, the currency pair ended the day in positive territory.  In fact the EUR/USD has not closed 1.3495 (essentially 1.35) despite multiple breaks on an intraday basis, making this price level extremely important.   On Friday, we learned that EUR/USD short positions hit a record high as of last Tuesday.  A lot of money has been made shorting euros between December and February and those traders will have no qualms about squaring their short positions if there is even a tiny reason to do so.  Therefore with Greece unveiling their new austerity package tomorrow, the event risk may be too significant for some traders bear.  Eurozone economic data also surprised to the upside with producer prices rising more than expected and consumer prices in line.  German retail sales figures are due for release tomorrow along with the final Eurozone service sector PMI numbers.  Given the sharp drop in the retail PMI index, German consumer spending is expected to be weak.  Greece’s austerity package could help the EUR/USD extend its gains, but more public spending cuts and tax hikes will ultimately slow the Greek economy and so long term we still believe that the EUR/USD could be headed lower.  Meanwhile the Swiss economy grew by 0.7 percent in the fourth quarter, which was stronger than the market expected which in turn pushed annualized GDP growth up from -1.3 to 0.6 percent.  The Swiss economy is beginning to recover but the pace of growth is still nominal compared to the U.S. and other countries around the world.  

GBP/USD: STILL HEADED LOWER

The British pound has been unable to rally for the past 10 trading days (based upon 5pm EST closes).   This is the longest stretch of weakness that we have seen in the GBP/USD since late August of 2008, in the heat of the financial crisis.  Both the Financial Times and the Wall Street Journal have attributed the sell-off in the GBP to the political uncertainty in the U.K.  It is an election year in Britain but this should not come as a surprise to anyone and neither does the slipping popularity of the ruling Labour Party.  Instead, we credit the move in the sterling to the continual deterioration in U.K. economic data that is making it increasingly difficult for the Bank of England to avoid increasing their Quantitative Easing program.  According to the manufacturing PMI report released earlier this week, there was no acceleration or deceleration in manufacturing activity last month.  The construction sector on the other hand contracted at a slightly faster pace. The housing market has long been one of the strongest parts of the U.K. economy and it is also beginning.  House prices grew by 0.1 percent in February, the slowest pace since June.  Consumer confidence and service sector PMI are due for release tomorrow and there is a good chance that these figures will disappoint as well.  If Greece’s austerity package manages to alleviate concerns about their fiscal issues, investors will start to look for weakness in other parts the world.  Based upon the price action in the GBP, some traders have already found the U.K. to be the next ticking bomb.  With the British pound deeply oversold, there is a risk of a rebound but any gains in the currency will be limited ahead of the Bank of England’s monetary policy announcement.

USD/CAD: HAWKISH COMMENTS FROM BOC

The Bank of Canada backed off their pledge to leave interest rates unchanged until June, sending the Canadian dollar sharply higher. Having only lowered their growth and inflation forecasts in January, the BoC acknowledged that inflation and output was stronger than forecasted.  As a result, they dropped the reference to having flexibility at low rates and their comment that inflation risks are tilted to the downside in their monetary policy statement. Although the BoC is still worried that a strong currency and weaker U.S. demand could slow growth and reiterated that interest rates are expected to remain at 0.25 percent through June, they openly admitted that they could raise rates sooner if needed. There is a laundry list of reasons why the BoC grew more hawkish. With a healthy labor market, stronger GDP growth, higher inflationary pressures, an expanding manufacturing sector, a hot housing market and elevated oil prices, the economy is doing alot better than the central bank is leading everyone to believe. Nonetheless, Canada knows that they are very sensitive to U.S. growth and until the U.S. economy has returned to consistent job growth, the BoC will refrain from appearing overly optimistic. We still expect the hawkishness of BoC to fuel further gains in the CAD. Meanwhile the Australian dollar received a boost from the Reserve Bank of Australia’s 25bp rate hike.  As we suspected, the RBA attempted to temper the market’s reaction to their rate hike by expressing concern about the sovereign risks in other countries.  However this did not draw away from the fact that the Australian economy is performing extremely well.  Consumer spending jumped 1.2 percent in January, offsetting the 7 percent decline in building approvals.  The RBA’s rate hike may not have cooled consumption, but it has certainly cooled building activity.  Service sector PMI and GDP are due for release this evening and we continue to expect strong numbers from Australia.  

USD/JPY: IMF PUSHES CHINA FOR REVALUATION

The Japanese Yen strengthened against every major currency except for the Aussie and Swissie which benefitted from stronger economic data.  The rally in the Yen can be attributed to a few different factors.  March is the fiscal year end in Japan and usually this means Japanese corporations will repatriate their funds to Japan to window dress their balance sheets. The Yen tends to rally during this time of the year, particularly against the U.S. dollar.  The Yen is also benefitting from a report released by the IMF who called China’s currency “substantially undervalued” and pushed for greater flexibility in the renminbi.  We have often said that Japan is the proxy for Asia and that any revaluation by China will drive the Yen higher.  As seen today, even speculation of Yuan revaluation has impact the Yen.  With this in mind, China is never one to bow to political pressure and we believe that it won’t be long before they remind traders that their exchange rate policy remains intact.  Japanese economic data was mixed with the jobless rate felling from 5.2 to 4.9 percent in January, but the annualized pace of household spending slowing from 2.1 to 1.7 percent.

GBP/USD: Currency in Play for Next 24 Hours

The GBP/USD will be the currency in play for tomorrow. Nationwide Consumer Confidence will be released at 00:01GMT or 7:01PM EST this evening from U.K followed by Service PMI figures at 9:30GMT or 4:30AM EST. The ADP employment report will be released from the U.S. at 13:15 GMT or 8:15AM EST while Non-Manufacturing ISM is due at 15:00GMT or 10:00AM EST. The massive sell-off in the GBP/USD pushed the pair deep into the Sell Zone which we determine using Bollinger Bands. However, the persistent downtrend seems to be overextended for the time being as the pair fell for last six sessions (based upon 12am close). If the pair continue to drift lower, yesterday’s low of 1.4780 will serve as support. The downtrend will be negated if the GBP/USD manages to break back above the first standard deviation at 1.5250.

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Comments (3)

FXDragon

March 03, 2010 at 01:13 AM ET

Service ISM employment is a weak indicator for nfp. Has been this year anyway. Weekly claims is a good indicator and has to print below 450k for job improvement. How come its not improving if manufacturers and services are hiring anyway right.

alexjbrandt

March 03, 2010 at 02:24 AM ET

Manufacturers only account for about 12% of US GDP, and services account of at least 70%. Services are not hiring as fast as manufacturers (who seem to be leading the recovery ironically)

alexjbrandt

March 03, 2010 at 02:28 AM ET

I only say its ironic, because manufacturing is such a small part of our GDP, that you wouldn't think it would be leading the recovery, especially since there is stiff global competition from developing countries. And that much of our manufacturing has been outsourced over the last decade. But the rise in exports proves that there is demand for US made goods, only because we make higher quality products vs cheap products that fall apart. :P

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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.