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Will Payrolls Hurt Or Help The Dollar?

Last updated 10/6/2011 4:55 PM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• WILL PAYROLLS HURT OR HELP THE DOLLAR?
• EUR: RALLIES POST ECB SHORT COVERING
• GBP: BOE LAUNCHES NEW ROUND OF QE
• CAD: IVEY PMI POINTS TO WEAKER JOB GROWTH
• AUD: CONSTRUCTION PMI ON TAP
• NZD: OIL EXTENDS GAINS, UP 3 PERCENT
• JPY: BOJ TO LEAVE RATES UNCHANGED

EXPECTATIONS FOR UPCOMING FED MEETINGS

WILL PAYROLLS HURT OR HELP THE DOLLAR?

The U.S. dollar traded lower against every major currency today with the exception of the British pound, which was weighed down by the central bank’s surprise decision to increase their asset purchase program. With the Bank of England restarting Quantitative Easing and the European Central Bank engaging in their own form of quasi-QE through covered bond purchases, everyone is looking at the Fed and wondering when will they be next. How quickly the U.S. central bank engages in another round of asset purchases will largely hinge upon the degree of job growth in the month of September. Economists currently expect only 55k jobs to have been created last month, which is a rebound but a pathetic one at best. Most of the other labor market reports released earlier this week showed only a mild improvement in job growth and we find it curious that President Obama urged Republicans to pass his jobs bill on the eve of the non-farm payrolls release. Perhaps he has some insight that the rest of us are not privy to until tomorrow. For more on what to expect for non-farm payrolls, read our NFP Preview: Impact on Dollar and QE .

The big question for currency traders tomorrow is how the dollar could react to the non-farm payrolls release. Investors are already short dollars against the Japanese Yen going into NFPs, which means that the reaction to a weak number in USD/JPY could be limited. A strong payrolls report on the other hand could trigger a round of short covering that drives USD/JPY back towards 77.30. In contrast, investors are aggressively long dollars against the euro, which means that at least initially a weak non-farm payrolls report will trigger a sharp rally in the EUR/USD. However as we have seen in past years, risk appetite can quickly take hold of the EUR/USD. This means that a weak number could end up being more positive for the dollar against the euro than negative but with traders already aggressively short the currency pair, the downside is probably limited. Although economists are looking for 55k job growth, we believe that the magic number is 100k. Job growth between 25k and 100k will be considered weak. Anything in excess of 100k and investors will start to question how quickly the Fed will implement QE3. Negative job growth on the other hand would be very bad for USD/JPY.

EUR: RALLIES POST ECB SHORT COVERING

The euro soared against the U.S. dollar following the European Central Bank’s decision to introduce new measures to boost liquidity and ease the strains in the financial market. With EU officials keeping the market waiting on Greek aid and expansion of the European Financial Stability Facility, investors were relieved to receive some type of support from the ECB, even if it wasn’t a rate cut. Although the European Central Bank left interest rates unchanged at 1.50 percent this morning, they did not to hesitate to announce a number of new liquidity boosting measures. In the last press conference of his career at the ECB, Trichet did not blink when he introduced four new ways to ease the tensions in the financial markets and encourage banks to lend. The tone of the ECB press conference was extremely decisively with Trichet repeating “also decided…” enough times for investors to realize that even though they did not lower rates, they have taken enough steps to push yields lower and engage in quasi QE. With the downside risks to the economy “intensifying” and inflation expected to ease next year, the central bank realized that they cannot afford to sit by idly for another month particularly since they are moving into a period when Greece will be quickly running out of money causing widespread volatility and strains in the financial markets. For these reasons, the ECB introduced two long term refinancing operations (LTRO) in the form of 12 and 13 month loans as fixed rate tenders, continued to conduct its main refinancing operation, offered 3 month LTROs and restarted its Covered Bond Purchase Program to the tune of EU40 billion. These measures will help ease the strains in the market but more involvement by the ECB is needed to end the sovereign debt crisis. Considering that Trichet refused to disclose the number of members favoring a rate cut and that growth will be “very moderate in the second half of the year” we expect Mario Draghi to ease interest rates when he takes over as the new ECB President in November.

GBP: BOE LAUNCHES NEW ROUND OF QE

The British pound weakened against both the euro and U.S. dollar today on the heels of the Bank of England’s surprise announcement.  Traders dumped sterling after the BoE introduced a new round of QE. While the central bank held the overnight rate at the record-low of 50 basis points, their asset purchase program was expanded by 75 billion pound. The news of QE2 by the U.K. central bank took the market by surprise as most of the market participants anticipated BoE to delay its announcement to November. The aggressive steps taken by the central bankers indicated that the urgency in stimulating growth outweighed the risk of adding more price pressures. Furthermore, BoE’s Monetary Policy Committee expressed concerns that inflation could undershoot the 2 percent target in the medium term amid a global slowdown. “In the light of that shift in the balance of risks, and in order to keep inflation on track to meet the target over the medium term, the committee judged that it was necessary to inject further monetary stimulus into the economy,” the MPC said in their statement. With its newest round of easing, the bank forecasts the inflationary pressure would subside as demand weakens and energy prices moderate. Meanwhile, in a letter to approve the asset purchase program, Chancellor George Osborne suggested that the Treasury could take complementary actions in supporting the recovery with credit easing for small businesses. The outcome of the easing scheme would not be seen until 2012 but it is likely to lend great support to the economy. Looking forward, we have the producer prices due for release tomorrow, which could moderate further with lower energy prices in September.

CAD: IVEY PMI POINTS TO WEAKER JOB GROWTH

The improvement in risk appetite drove the Australian, Canadian and New Zealand dollars higher against the greenback. Canada was only commodity producing country to release economic data over the past 24 hours and the sharp decline in building permits along with the slowdown in manufacturing activity explains why the Canadian dollar experienced the shallowest rally against the greenback today. Building permits fell 10.4 percent while IVEY PMI dropped to 55.7 from 54.8. Although the slowdown in growth was less pronounced than economists had anticipated, the employment component of the report fell below 50 for the first time since February 2010. This means that the manufacturing sector is losing more jobs than it is adding which does not bode well for Friday’s Canadian employment report. After experiencing net job losses in August, Canada is expected to report positive job growth. Unfortunately the dip in the employment component which marked the fifth consecutive month of deterioration signals weaker and not stronger job growth. These disappointments in economic data explain why the CAD has shrugged off the 8 percent rise in oil prices over the past 48 hours. Construction sector PMI numbers are due for release from Australia this evening. The rebound in the Aussie has been particularly impressive considering the Reserve Bank of Australia’s recent willingness to consider rate cuts. However easing in Australia was largely contingent upon growing uncertainty in Europe which means that if the Eurozone gets their act together, the RBA may not need to lower interest rates.

JPY: BOJ TO LEAVE RATES UNCHANGED

The Japanese yen strengthened against most of major currencies with the exception of the euro, Australian and New Zealand dollar. After more supportive measures announced by the Eurozone central bankers, improved risk appetite fueled demand for risk trades at the expense of the Yen. In spite of another quiet day on the economic calendar, BoJ Governor Masaaki Shirakawa offered a bleak assessment of the country’s economic outlook on Wednesday as Europe’s debt crisis keeps the safe-haven yen at stubbornly high levels. With the U.S. economy “close to faltering,” the Japanese central bank has grown increasingly cautious over developments overseas. As its major trading partner, a deteriorating U.S. economy could put a squeeze on demand for Japanese goods and divert more risk aversion flow into yen. While the BoJ is expected to hold its overnight rate at 0.1 percent after its two-day meeting, Japan’s main opposition Liberal Democratic Party (LDP) called on BoJ to ease monetary policy and to intervene more aggressively in the currency market. A group of LDP lawmakers handed their proposals to Finance Minister Jun Azumi. The plan asked the central bank to set an inflation target around 1.5 percent and boost its asset-buying vehicle by another 10 trillion yen to combat the appreciation in the currency and to stimulate growth. Nonetheless, as the sovereign debt crisis continues to play out in Europe, any further unilateral action to contain the yen’s strength could have only a temporary effect. Market participants remain hooked on yen’s safe-haven appeal amid a lackluster global recovery. Thus, Mr. Azumi’s ability to secure backing for intervention in the upcoming G20 meeting would be watched closely by traders. A coordinated effort by the G20 could alleviate the pain felt by the Japanese exporters due to the recent strength in yen. Looking forward, we have Leading Index and Coincident Index on the docket tomorrow.

USD/CAD: Currency in Play for Next 24 Hours

USD/CAD will be our currency pair in play for the next 24 hours. From Canada, we expect Net Change in Employment, unemployment rate, and participation rate at 7:00 AM ET/ 11:00 GMT. From the U.S., we expect Non-Farm Payrolls and unemployment rate at 8:30 AM ET/ 12:30 GMT.

Despite its recent rally, USD/CAD has fallen into range-trading zone which we determined using the Bollinger Bands. The nearest support is at today’s low of 1.0370, which is adjacent to the 10-day SMA. Further down, USD/CAD could find major support at 1.0290, the 38.2% Fibonacci level. We drew our Fibonacci retracement from the record-low in July to the swing high in October. On the flip side, the first resistance level sits at the recent high of 1.0657. If broken, the pair’s rally could target the psychologically significant 1.10

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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.