Dollar Bulls Are Looking Beyond Feb Payrolls

Last updated 3/5/2010 5:07 PM ET (GMT -5) 10 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• DOLLAR BULLS ARE LOOKING BEYOND FEB PAYROLLS
• EUR/USD: GREECE BAILOUT OR NO BAILOUT?
• GBP/USD: WILL NEW SIGNS OF INFLATION PROMPT THE BoE?
• USD/CAD: UPSIDE MOMENTUM BEGINNING TO FADE
• NZD/USD: SHARP GAINS, RBNZ NEXT WEEK
• AUD/USD: OIL AND GOLD UP
• USD/JPY: BOJ CALLS FOR FISCAL REFORM

EXPECTATIONS FOR UPCOMING FED MEETINGS

DOLLAR BULLS ARE LOOKING BEYOND FEB PAYROLLS

Thanks to the better than expected U.S. non-farm payrolls report, the sun is shining brightly on the financial markets.  Equities rose to their highest levels in more than a month while the dollar saw its strongest performance against the Japanese Yen since early December. The improvement in risk appetite helped to drive currency traders out of the safety of U.S. dollars and back into higher yielding and riskier currencies such as the Australian and New Zealand dollars.  Forex traders even bought euros and sterlings despite problems in the hopes that a stronger U.S. recovery will reduce risk in the rest of the world.  Whether the U.S. is able to live up to this tall task remains to be seen but at minimum, the better than expected non-farm payrolls report will make U.S. investors more optimistic and help to sustain risk appetite in the forex market.

Payrolls: Looking Beyond February into March

It was not so much the better NFP print that had traders jumping into the dollar but rather the possibility of very strong job growth in March.  Prior to the payrolls report, economists were warning that the snowstorms would cause job losses to balloon but now they have turned to say that the snowstorms are hiding job growth.  Payrolls declined by 36,000 last month, which was much less than the forecasts by some economists who called for job losses in excess of 100k.  According to Bureau of Labor Statistics, more than 1 million people in nonagricultural jobs were unable to work due to inclement weather.   The historical average of weather related job losses in February is closer to 290,000.  Of course this does not mean that 1 million jobs will be added back to payrolls this month, but there is a going to be a strong positive contribution from the improving weather.  Furthermore, the government is preparing the 2010 Census and this will require the hiring of 1.15 million temporary workers.   Hiring has already begun but the bulk of jobs will be created between April and June.  This means that non-farm payrolls could be very healthy over the next few months but will taper off after the Census surveys are completed.  The blizzards in the Northeast clearly did no damage to the labor market. The most encouraging part of the labor market report was the rise in service sector jobs. There has now been positive job growth in services 3 out of the past 4 months. Temporary hiring continues to be strong, which is the first sign of a turnaround in the labor market. Companies prefer temporary hires at the beginning stages of a recovery and permanent hires once the economy has stabilized. Education and healthcare is another sector that also added jobs. The better than expected non-farm payrolls report kept the unemployment rate at 9.7 percent but unfortunately the labor statistics were not unambiguously good. The manufacturing sector only added 1k jobs, average hourly earnings growth slowed to 1 percent and average weekly hours worked fell from 33.9 to 33.8. If the Federal Reserve is watching (and they are), the better jobs number will give them another reason to continue normalizing monetary policy and in turn more reason for forex traders to buy dollars.

Stronger Consumer Spending Could Fuel Further Gains in USD

There are only 3 major releases on the U.S. calendar next week and all of them are due at the end of the week.  The most important will be Friday’s retail sales report.  The original fear was that the blizzards also crimped consumer spending but after the NFP report, there is a good chance that economists also underestimated consumer spending.   Based upon the International Council of Shopping Centers and the Johnson Redbook same store sales reports, retail sales were very strong last month.   However with two major snowstorms hitting the Northeast in February, a lot of stores were closed and many shoppers were stuck at home which is why economists are looking for a decline in retail sales even though most individual retailers have reported an increase in sales.  Ross Stores and TJX Companies reported double digit sales growth while Costco and BJ said sales rose 9 and 7.5 percent respectively.  Even Kohl’s and Macy’s reported 3.7 percent increases in sales.   Consumption was so strong that according to ICSC, retail sales grew the most since late 2007.  With gas prices rising in February, the only argument for weaker spending is the snow and this argument has weakened significantly after the payrolls report.  Despite the storms in the Northeast, the rest of the country probably picked up the slack. A stronger retail sales report would add to the upside momentum in the dollar especially since the market expects a decline.  In addition to this report, the U.S. trade balance and the University of Michigan Consumer Sentiment report are also worth watching.  

Last week, short euro positions hit a record high and according to the CFTC’s Commitment of Traders report, futures traders have reduced their short euro positions slightly.  They have continued to increase their long Japanese Yen, Australian and Canadian dollar positions but remain short British pounds.  In fact, short pound positions have hit a record high. This signals the strong risk of a short squeeze in the coming week especially if risk appetite continues to improve.  

EUR/USD: GREECE BAILOUT OR NO BAILOUT?

The euro participated in today’s risk rally but gains were held back by continued concerns about Greece.  The government has approved the new austerity plan despite violent protests in Athens.  The European Union may be temporarily pacified by this plan, but investors are not.  Based upon the lackluster rally in the euro despite strong economic data and a broad based improvement in risk appetite, it is clear that most investors are still waiting for a bailout. Unfortunately even members of the European Union cannot agree on the principle of a bailout.  Euro group Chairman Junker said this morning that there is no reason to expect German taxpayers to have to rescue Greece but they cannot rule out the possibility that Greece may need help from EU Partners.  According to Bloomberg, the European Commission's Juergen Kroeger told a private meeting that financial assistance to Greece would be forthcoming if they needed it.  Our good friend Andy Busch of BMO cleverly points out that this “is analogous to the implicit guarantee provided for the US GSE's that gave Fannie and Freddie the ability to borrow at lower rates than their competitors.  I think this is one of the reasons why the Greek debt auction was oversubscribed.  If this is true, then the question now becomes when does the crisis become so acute that the implicit becomes the explicit?”  Greece’s problems will continue to determine the fate of the euro.  Meanwhile there continues to be signs of strength in the Eurozone manufacturing sector.  Thanks to a weak currency and external demand, German factory orders rose 4.3 percent in January, the strongest pace of gains since June 2007.  This should bode well for Monday’ industrial production and the trade balance figures later in the week.  

GBP/USD: WILL NEW SIGNS OF INFLATION PROMPT THE BoE?

The pound posted its strongest gain in nearly two weeks on renewed confidence in the viability of the world’s economic recovery. The same optimism that gave the pound new momentum also pushed Britain’s FTSE 100 index to an 18-month high.  Annualized Producer Prices surged at the fastest rate since December of 2008, while the monthly index gained for the twelfth straight month. In addition, core prices, which exclude volatile items like energy and food, rose the most in a year. The report adds evidence to a recent trend that has seen the country become a hotbed of inflationary pressures, one that may eventually challenge the BoE’s pledge to be one of the most dovish central bank on the planet. However, any change in the banks course will only be feasible if the pressure is sustainable. Since the majority of central bank officials believe that hotter inflation is a temporary phenomenon, it will take a lot more to change their mindset. Next week starts with the release of the Trade Balance on Tuesday, which paves the way for Industrial and Manufacturing Production on Wednesday.

USD/CAD: UPSIDE MOMENTUM BEGINNING TO FADE

Although the Canadian, Australian and New Zealand dollars extended their gains against the greenback, the rally in the loonie was modest at best.  After rising for six consecutive trading days, it is not surprising to see the upside momentum in the CAD begin to fade.  Yet with Finance Minister Flaherty crediting the stronger currency to the improvements in Canada’s economy and oil prices continuing to press higher, the odds favor further gains.  Canadian trade and employment numbers are due for release next week and continued job growth is expected, although the pace will certainly slow after the surprisingly strong numbers in January.  There was no economic data from New Zealand but that did not stop the kiwi from rising close to 1.5 percent.  The currency has been performing very erratically lately and unfortunately there is nothing to explain the move.  The Reserve Bank of New Zealand has a monetary policy meeting next week where they are expected to leave rates unchanged at 2.5 percent. The improvement in risk appetite also helped the Australian dollar despite a drop in construction sector PMI.  The only meaningful release on the Australian calendar next week is employment, which should be strong given the uptick in the service and manufacturing sectors. 

New Stimulus for China

The latest announcements from China underscore how hard it is to track developments in fiscal and monetary policy. Lately, markets have been hit by signs that the economy is pulling back, first with reports that indicated banks were told not to lend followed with a hike in the required reserve ratio. However, after Premier Wen Jiabao’s address at the National People’s Congress, the focus is on adding stimulus rather than taking it away. Jiabao pledges a new stimulus program totaling 200 billion Yuan that will be used to fund local infrastructure projects. The tactic, which will be financed by new debt issuances, is being put into place to ensure that the economy meets Jiabao’s 8 percent target for growth. Wen appears concentrated on continuing a model of economic support, saying that “we must not interpret the economic turnaround as a fundamental improvement in the economic situation”. Supportive measures are also expected to keep monetary policy easy. Nevertheless, he does note that the sharp gains in the property market represent a “latent risk” for the economy. In fact, inflation may become a concern as it is widely expected to exceed the 3 percent target. These latest developments should reach excited ears in countries like Australia, which have depended greatly on Chinese demand to resist recessionary forces.

USD/JPY: BOJ CALLS FOR FISCAL REFORM

USD/JPY staged a very strong rally today with most of the other yen crosses mirroring its gains after speculation erupted about the BoJ considering another move to ease monetary policy. The Nikkei English News released an unconfirmed article that explained that the central bank will debate whether to initiate new easing measures at their next meeting later this month. If true, the reports could confirm the fact that the BoJ has officially given in to continuous battering by the government with requests to battle deflation more aggressively. Japan’s Finance Minister Naoto Kan, who has been leading calls for the BoJ to take more action, said that he has not received notice of any move directly from the BoJ, but would approve of the action. The Japanese central bank has already developed a laundry list of measures, the last of which announced late last year, to fight their way out of the great recession. Adding on to these initiatives would signal that the bank has been unsuccessful in prior attempts. Kan also added weight onto the yen’s fall by mentioning that he thinks the currency’s gains may “ease a bit.” No economic data was released today but next week brings the Trade Balance on Monday and final fourth quarter GDP on Wednesday.

EUR/USD: Currency in Play for Next 24 Hours

The currency in play for Monday is EUR/USD. German Industrial Production will be released at 11:00GMT or 6:00AM EST. After an enormous downtrend, the EUR/USD has attempted to bottom by entering the range trading zone which we determine using Bollinger Bands. However the bands are extremely narrow, which reduces their significance and instead signals the strong possibility of a breakout.  The levels to watch for a breakout are 1.3790 on the topside and 1.3430, this year’s low on the downside.  

Comments (10)

schultzz.at

March 06, 2010 at 01:06 AM ET

Futures traders have nearly doubled their CAD long positions by 27.6K to 56K (51% of open interest). The increase in the JPY was even more impressive with 30.8K, and these traders have already been burned.
With the VIX at its mid-January low and the CAD March contract expiring on 03/16 I feel confident that USD/CAD will reverse its direction.
Tom Schultz.

FXDragon

March 06, 2010 at 01:59 AM ET

I also expect usdcad to reverse after next week. But how are yen longs burned? Yen had a crazy rally.

schultzz.at

March 08, 2010 at 02:55 AM ET

The ramp up in JPY longs in the week through 3/2 of 30.8K contracts was impressive and confusing given that USD/JPY is range trading and the expiration of the contract is close. Maybe it was a Pavlovian reaction to the consumer confidence/housing/employment data misses at the end of February.
In any case, last week the market turned against them violently. Maybe their net long position is already back at zero or a significant number of traders is still trapped, we don't know.
I am taking a neutral position on the USD/JPY as a rise in volatility and a drop in U.S. bond yields may push the pair below 90 once more.

I think the USD/CAD gives the clearest signal right now. The 56K long position is higher than the 44K at the previous low on 10/13/09 and the contract is expiring next week.
Tom Schultz.

MoneyManager

March 08, 2010 at 03:09 AM ET

The US 10-year yield is up 10 basis points since Thursday. The 2-year has also added yield. I don't know what you are seeing, but it's not what I'm seeing. Japanese bonds are going the other way. Below 90? Sure, it's only a few pips away. But again, for how many times, the bears *FAILED* to crack 88 (except for what increasingly looks like a washout low in November). Growling bears all over the place. But they can't submerge this pair. Know what happens if that continues?

MoneyManager

March 08, 2010 at 03:49 AM ET

schultzz.at: I would add one other thing, if I may. Don't confuse the futures market with the cash market. FX cash *dwarfs* the futures market. FX cash players can, and will, crush futures players at will. My main point here is that you cannot get a handle on overall market sentiment from the registered futures market. There are humongous cash players waiting in the wings who can trample these highly leveraged players in futures.

I have always maintained the following: If you can see it ("it" being the bid ask levels on some security, or the open interest, or whatever), someone probably wants you to see it. And taking action off of what you see can be deadly. This is a *huge* money game. It attracts the best and the brightest, and it attracts people who are very good at deception and feint. Be *very* wary of what you see. As I say, if you can see it, somebody probably *wants* you to see it. Think about that, please.

schultzz.at

March 08, 2010 at 03:59 AM ET

I think we are members of the same party arguing about technical details. I think the quarter century of Plaza Accord yen is in its terminal stage.
Still, I would like to see a spike in the VIX and a correction in the Dow before I commit to USD/JPY longs.
Tom Schultz.

MoneyManager

March 08, 2010 at 04:43 AM ET

Tom, we just went through a correction and a spike. And in spite of that, bears were not able to take the pair below 88. Waiting for a good entry is critical of course. But don't let the perfect become the enemy of the good.

FXDragon

March 06, 2010 at 02:03 AM ET

What are the central bank rates in China, Russia and India?

FXDragon

March 08, 2010 at 04:15 AM ET

I think deception and feints should be banned:) Can we use them as mirrors? Because sometimes they show the right scene for some reason:)
Oh wait thats called speculation. Manipulation was the illegal one right.

MoneyManager

March 08, 2010 at 04:26 AM ET

It's kind of funny, because in equities here in Japan these "deceptions" make great plays -- providing you know what you are looking for. I see a stock bid, for example 500 @ 2610, 1500 @ 2613, 1000 @ 2615, etc. Then 30,000 offered at, say, 2620. Looks like sellers far outnumber buyers, right? The correct move, invariably, is buy. See if you can add a bit to each of the paltry bids without spooking the offer (who may also be the multiple bidder). But watch for that big offer at 2620 to suddenly become a bid before you have time to press a keystroke. ^_^ Folks who think there isn't deception in this business are themselves deceived. :)

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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.