All Trade Ideas and trading scenarios found on FX360.com are hypothetical. FX360.com has not placed these Ideas in a live trading environment. Forex Trading involves high risks, with the potential for substantial losses that exceed your initial deposit and is not suitable for all persons. Past performance is not necessarily indicative of futures results.

USD: For NFP, 100K Is Magic Number

Last updated 2/2/2012 5:03 PM ET (GMT -5) 0 Comments - Add your comment

• Share this:

Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• USD: FOR NFP, 100K IS MAGIC NUMBER
• EUR: KNOCKING ON CHINA’S DOOR
• GBP: POSEN CALLS FOR MORE QE
• CAD: EMPLOYMENT NUMBERS ON TAP
• AUD: HIGHER TRADE SURPLUS
• NZD: GOVT DOWNGRADES GROWTH FORECASTS
• JPY: NOT EVERY JAPANESE OFFICIAL THINKS INTERVENTION IS IMMINENT

EXPECTATIONS FOR UPCOMING FED MEETINGS

USD: FOR NFP, 100K IS MAGIC NUMBER

There has been very little consistently in the performance of the greenback ahead of Friday’s non-farm payrolls report. The USD ended the North American trading session marginally higher against the EUR, GBP, CAD and CHF, but weakened slightly against the JPY, AUD and NZD. Although the EUR/USD has been in consolidation mode for the past 6 trading days, the dollar for the most part has continued to lose value against other currencies.  If Friday’s non-farm payrolls report turns out much weaker than expected, the impact on the Federal Reserve’s plans for QE3 may be enough to drive the greenback to fresh monthly lows.  If this occurs, the EUR/USD could see a sustained break above 1.32. Yet this would only occur if job growth is exceptionally weak and yet it is not expected to deteriorate by much. In November, U.S. companies added 200k workers to their payrolls and for December, the pace of growth is expected to have slowed to 145k. Most of the leading indicators for non-farm payrolls point to weaker job growth but there has not been enough deterioration in these reports to lead to us to believe that payrolls will be abysmally weak. Unless American companies added fewer than 100k jobs last month, the dollar may only see a limited reaction to payrolls. This morning, Fed Chairman Ben Bernanke said the jobs situation improved modestly in the past year, but we have long way to go before the job market is normal. According to their latest economic projections, the Federal Reserve believes that the unemployment rate will decline further in 2012 but the improvement will not be extensive enough to remove the need for more stimulus. Bernanke feels that the recovery has been frustratingly slow and vulnerable to shocks as U.S. consumers face significant headwinds.   In an environment such as this, a weak non-farm payroll report would have more significant impact on the U.S. dollar than a strong release.

To start, the unwinding of seasonal hires in January will contribute negatively to payrolls – 40k temporary couriers were hired for holidays alone. Private payroll provider ADP reported an increase of 170k jobs last month versus 292k in December. Although ADP does not have the best track record of forecasting the absolute amount of private sector payrolls, it has been fairly reliable as a directional indicator and this month points to softer job growth. At the same time, the four week moving average of jobless claims ticked up slightly in January which is in line with a weaker but not terrible NFP report. Challenger Grey & Christmas reported a 38 percent rise in layoffs. Consumer confidence indicators were mixed with the Conference Board reporting deterioration in sentiment and the University of Michigan reporting an improvement. The only good news was continuing claims which fell to their lowest level since September 2008.  Jobs have long been the missing ingredient in the U.S. recovery and slowly but surely the labor market is improving. Unfortunately the jobless rate is not falling fast enough to mitigate the downside risks in the global economy.  With Europe’s sovereign debt troubles still holding the world hostage, better than expected economic data from the U.S. will have a diminishing impact on the U.S. dollar until the Federal Reserve starts to feel comfortable enough to raise interest rates.

EUR: KNOCKING ON CHINA’S DOOR

There have been no new developments out of Europe over the past 24 hours and for this reason, the euro continued to consolidate against the U.S. dollar. The only piece of economic data out of the Eurozone was producer prices which fell 0.2 percent in the month of December. Inflationary pressures have been falling across the globe and so it is not a surprise to see producer prices in Europe ease.  Central banks around the world, the ECB included believe that prices will hold steady and possibly decline further this year as demand continues to slow. Discussions between Greece and the IIF are moving forward and according to the IIF, who represents private bond holders, a deal is imminent. Portugal’s 10 year bond yields have declined further to 13.75 percent but Greek bonds yields have moved up by 22bp. France and Spain’s latest bond auctions went off without a hitch, keeping the EUR/USD well supported.  Meanwhile German Chancellor Merkel went knocking on China’s door today urging the country to contribute to Europe’s bailout funds. During a joint press conference with Merkel, Chinese Premier Wen Jiabao said “It is very urgent and important to resolve Europe’s debt crisis” and with that in mind “China is considering greater involvement in resolving Europe’s debt crisis by participating in the European Financial Stability Fund and the European Stability Mechanism.”  Financial commitment by China would be extremely supportive of the euro because it would represent a strong vote of confidence from one of the world’s richest investors. Whether China follows through remains to be seen but even within Europe, quite a bit of people are skeptical about the region’s ability to rise from the ashes. Juncker, who heads up Euro-area finance ministers called the outcome of the January 30 ^th EU Summit “largely insufficient” and said that more steps will need to be taken in March. According to Dow Jones, the Finance Ministers of Germany, Finland, Luxembourg and the Netherlands have agreed to meet on Friday which will be followed by a meeting between Germany and France on Monday. There is no question that Greece will be on the top of the agenda and for currency traders, this means that an eye needs to be kept on the headlines for any market moving comments out of Europe Friday and Monday.

GBP: POSEN CALLS FOR MORE QE

The British pound weakened against the U.S. dollar and euro following dovish comments from Bank of England monetary policy committee member Posen. In an interview with Bloomberg, Posen said there is a case for another GBP75 billion increase in Quantitative Easing if no changes are made to the central bank’s economic forecasts. The Bank of England meets next week to decide on monetary policy and there is a reasonable chance that given the contraction in the U.K. economy in the fourth quarter and its performance since then, the central bank could increase monetary stimulus. According to a poll conducted by Reuters, most economists are looking for the asset purchase program to increase by GBP 50 billion. Posen has long been the most dovish member of the central bank, having voted for raising the QE program more often than his peers, but this time, his dovish stance may be shared by many of his peers. We know that at minimum Bank of England Governor King and MPC members Miles, Broadbent and Weale support this view. Last month, King said the decline in inflation gives the central bank flexibility to increase quantitative easing if needed. Based on the latest economic reports, there is little need for urgency. Yesterday we learned that manufacturing activity accelerated last month and today, even though activity in the construction sector slowed, it is still in expansionary territory. On Friday, PMI services are due for release and a small pullback is expected.

CAD: EMPLOYMENT NUMBERS ON TAP

The Canadian dollar sold off against the greenback while the Australian and New Zealand dollars strengthened. No economic data was released from Canada today but tomorrow will be a big day for the CAD with employment numbers scheduled for release. Job growth is expected to continue at about the same pace as the previous month with the unemployment rate set to remain steady at 7.5 percent. The Bank of Canada has expressed concern about the global economy and if job growth falls short of expectations, these worries could spread.  USD/CAD is teetering around parity and an exceptionally strong jobs report would be needed to drive it below that level. The Australian dollar received boost from stronger trade numbers – the country’s trade balance printed at 1.71B versus the 1.22B eyed. Gold exports surged to 457M, an increase of 31 percent. Moreover, the annual trade surplus also soared to a record high in 2011 due to China’s increasing demand for coal and iron ore. In the 12 months through December 31, the Bureau of Statistics report indicated a surplus of 19.3B. The latest data reinforced Reserve Bank of Australia’s expectation that Chinese demand for the nation’s commodities will help support the domestic economy even as a global expansion slows. In the midst of the mining boom, the two-speed nature of the country’s economy was also reflected in the loss of jobs in December, capping the worst year for employment since 1992. In another report from Australia, building approvals fell 1 percent on the month-over-month basis after climbing 10.1 percent in November. Mixed economic reports leave the door open for another round of easing by the RBA. Service sector PMI numbers are scheduled for release this evening. In New Zealand, the Treasury lowered its GDP forecast for the year ending March 2013 by 50 basis points. The cooling of commodity prices could pose a risk to the New Zealand economy in the form of weaker export balances.

JPY: NOT EVERY JAPANESE OFFICIAL THINKS INTERVENTION IS IMMINENT

The Japanese yen traded higher against all of the major currencies with the exception of the New Zealand dollar. With the changes in sentiment, traders pared back some of the risk trades ahead of the US nonfarm payrolls report. Despite yen’s strength, the Bank of Japan has been standing pat since easing monetary policy last October to alleviate the pain on the export-reliant economy from yen’s appreciation and slowing global growth. "If recent yen rises are sustained we need to carefully assess their impact on the economy and prices, but I do not think there is a need to immediately take policy action in response to recent yen rises," Hirohide Yamaguchi, the BoJ deputy governor, said in a news conference in Takamatsu, southwestern Japan. Yamaguchi is a key figure to watch for signals on the future direction of policy and has voted with the board since assuming his current post in 2008. Furthermore, Yamaguchi warned that Japan needs to get its fiscal house in order. With its government debt at more than twice of its GDP, the deputy governor heeded the importance of fiscal reform. "When a country's borrowing continues to rise, as is the case now, we cannot rule out the risk of some trigger causing market confidence to suddenly be eroded," Yamaguchi said. For more than a decade, the low JGB yields were supported by the domestic demands of Japan’s public debt. However, since the country’s first annual trade deficit in 30 years reported last week, that dynamic could gradually shift. Domestic savings could diminish and the current account could move into the red as corporations invest oversea amid the yen’s strength. Meanwhile, Finance Minister Azumi stepped up his currency rhetoric. "I am calmly watching the market now, but I can't overlook any acceleration in moves by short-term speculators" in the currency market, Jun Azumi told reporters at the Ministry of Finance. "As I have been saying, I will take decisive steps if deemed necessary." Nonetheless, many market participants do not expect a unilateral intervention after the US Treasury issued a strong reprimand against the unilateral action in its December report. Azumi’s comments showed caution in acting to contain yen’s rises. With the lack of economic releases tomorrow, trading in yen could largely hinge on news flows and data out of the US and Europe.

USD/CAD: Currency in Play for Next 24 Hours

USD/CAD will be our currency pair in play for the next 24 hours. We are expecting employment numbers from Canada at 7:00AM ET/ 12:00 GMT which will be followed by the US non-farm payrolls at 8:30AM ET/ 13:30 GMT. US factory orders and ISM non-manufacturing will be released at 10:00AM ET/ 15:00 GMT.

In spite of the rebound, USD/CAD has been trading in a downtrend, which we determined using the Bollinger Bands. The closest support is at 0.994, the lower second std. dev. Bollinger Band. On a break below that level, the pair could target the swing low of October and the 61.8% Fibonacci level at 0.9891. The Fibonacci retracements were drawn from the low in July to the one-year high in October 2011. Should the currency pair strengthen, the lower first std. dev. Bollinger Band could provide resistance at 1.0031. If this level is broken, the pair’s rally could be further contained at the 38.2% Fib level – 1.0179.

The information, including Commentary and Trade Ideas, provided on FX360.com should not be relied upon as a substitute for extensive independent research which should be performed before making your investment decisions. Global Forex Trading and FX360 .com is merely providing this information for your general information. The information and opinions presented do not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision and should tailor the trade size and leverage of their trading to their personal risk appetite. Any projections or views of the market provided by FX360.com may not prove to be accurate.

The views of the authors and analysts are not necessarily those of Global Forex Trading, its owners, officers, agents or other employees. FX360.com and the currency research team will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained on FX360.com. Global Forex Trading and the currency research team do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought.

Loading...

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.