Markets Consolidate Ahead of NFP

October 6 2010 by Spencer McKay in Forex Release |No Comments

Traders holding long JPY positions were bracing themselves for today’s Asian open. However, the ever-image-conscious Japanese clearly felt that a physical intervention just hours from the IMF / G7 meeting was not worth the reputation risk. Especially if Japan’s intention were to help the US pressure China to increase CNY flexibility.

Rhetoric from Japanese policymakers did increase significantly with Prime Minister Kan stating the classic phase “we cannot overlook excessive currency moves” and assuring the market that the nation would take decisive action in FX, when necessary. BoJ Governor Shirakawa also added his two cents stating that a stronger Yen negatively affects the Japanese economy. He added that the JPY risk reflected uncertainty in the global economy – specifically within the United States. Having heard these comments already from the same individuals, the market’s reaction was muted.

With a US & Japanese holiday on Monday – Tuesday may be a great day for the Japanese to push the market’s around a little bit, especially in a low liquidity environment. Clearly, the first few rounds of Japanese interventions, both verbal and physical, have more or less failed. Going forward, the samurari need to choose their battles wisely, especially if they’re going to be taking on the global FX market unilaterally. Given the “currency war” that being touted in Asia, we doubt Japan will be able to rustle up Asian supporters and/or international coordination on exchange rates to have any significant help. The BoJ minutes released yesterday unveiled that a few members are pushing for the Central Bank to move quickly to stop the spillover effect of a economic slowdown in the US and Europe from effecting Japan.

Yesterday, there was a busy USD selling session with key resistance levels being taken out across the GBPUSD, EURUSD and AUDUSD (1.60, 1.40, .9900 respectively). While Gold continues hog up the spot light in recent weeks, we started to see some really good action from oil yesterday, which was slightly odd given the global expectations for growth.

This move played more into the fact the expected trend for further QE in developed countries clearly will lead to near endlessly loose monetary policy and give further support to risk taking. Late in the day profit-taking in commodities produced some reversals but we suspect commodities to continue to appreciate in the near term. Given the global outlook for rates, we should see an increase in carry trade positioning, especially in the EMs and Scandies against the USD and JPY.

Yesterday’s much anticipated BoE & ECB rate decisions, as anticipated, were non-events.

From the ECB side, the only interesting remark was Trichet muttering that he “regarded the Forex market” and was “opposed to excessive moves and volatility.” The lack of details in the response illustrated that current the EUR strength is a non issue to the ECB.

As for the BoE, the decision to hold asset purchase at £ 200 bn gave the Cable a decent boost that failed to gain any traction.

Today – watch for the FX market to consolidate ahead of the critical US NFPs. News that Moody’s has placed China’s rating up for review for a possible upgrade gave Shanghai a boost trading up 3.13% and general risk appetite some positive momentum

For the US NFP, this looks to be another volatile one with estimates all over the place and the market underestimating the numbers effect on Fed policy (in finalizing what the actually size of QE will be). Wednesday’s ADP through a wrench in everyone econometric models with some adjusted and others highlighting the fact that past ADP readings have had little correlation to NFP numbers. With nearly all temporary census workers now finished, we suspect a decline in non-farm payrolls of -15k and the recent improvement in initial jobless claims points at an slightly recovering labor market. We are slightly lower than expectations for private payrolls, as we expect them to come in around 60k. Any upside deviation will have limited effect on the USD, whereas a disappointing reading which sound the air raid alarm for further USD selling.

Peter Rosenstreich
Chief Market Analyst

07:30 SEK Aug industrial production; prior +2.9% m/m.
08:30 GBP Sep PPI – core, +0.1% m/m, +4.2% y/y exp; prior +0.1%, +4.6%.
08:30 GBP Sep PPI – input, +0.4% m/m, +8.6% y/y exp; prior -0.5%, +8.1%.
08:30 GBP Sep PPI – output, +0.1% m/m, +4.3% y/y exp; prior unch, +4.7%.
12:30 USD Sep non-farm payrolls, +10k exp; prior -54k.
12:30 USD Sep private payrolls, +110k exp; prior +67k.
12:30 USD Sep unemployment, 9.7% exp; prior 9.6%.
13:00 CAD Full time employment change, thousSep
14:00 USD Wholesale inventories, %
14:00 Bank meetings begin (to the 10th), various speakers at various events

The Risk Today: EurUsd Once the main highlights of yesterday’s ECB conference we out the way, the bulls had nothing left to fear as they knocked out resistance at 1.4000 and went on to test the 4 Feb pivot 1.4025. For now, that latter level has held firm, but prior resistance levels have not stayed safe for long, and should we break higher then the path is cleared for a return to the 25 Jan highs of 1.4195. There are however a couple of factors that may be indicating a short-term correction is on the way; firstly the doji candlestick on the daily chart suggests that the bulls have lost their total dominance on the price action, and secondly, the steep 1-month uptrend channel looks to be breaking to the downside again (around 1.3940). In addition, this rally has now extended around 10.50% in the last month (unleveraged return!) and with the weekend comig up we may get some position squaring after this afternoon’s non-farm payrolls. Having been burned once this week already trying to short this pair prematurely, we hope for a correction to clear out the market a little and instead of trying to monetize the sell-off, look to buy on the dips and await another push higher. Bids are likely to wait around 1.3863 (yesterday’s low), 1.3800 (Wednesday’s low), 1.3635 (Tuesday’s low) and 1.3560 (30 Sep low). Further levels are eyed below at 1.3466 (38.2% fibonacci retracement of 1.6038 to 1.1876), and 1.3380 (28 Sep low).

GbpUsd A disappointing day for us yesterday; after the bulls punched through resistance at 1.5925-35 and activated the ascending triangle we marked out on the hourly chart, we went long and rode the pair all the way to its highs of 1.6019 –then watched the thing tank all the way back down and stop us out 1.5875 (lower edge of the triangle). Just one of those days. The pair still looks a little lacklustre this morning, and is currently probing a trendline vibration around 1.5840. Should it break below there, next bids are likely to come into play around 1.5750 (4 & 5 Oct lows) then 1.5670 (30 Sep low). For now, the 1.6000-20 zone should cap rallies; but if the bulls get re-energized and manage to break higher, then next levels above are anticipated at 1.6070 (3 Feb high), and the upper edge of the 1-month uptrend channel at 1.6180.

UsdJpy Yesterday saw USDJPY tumble into fresh 15-year lows after last support at 82.87 (15 Sep low) gave way and allowed the bears to drive us down to 82.12. We now see a potential bearish flag pattern being carved out on the hourly chart, meaning that if we see another plunge through 82.15 then we’ll be getting short and aiming for a target below at 81.25. As stated yesterday, on the downside there are really only two things to consider; 1) the massive void between here and next possible supports and 2) where the BoJ might step in to intervene. Alas we can only hazard guesses on the latter point, but we have long stated that intervention is unlikely to prevent further JPY gains, only slow them temporarily (as such, we’re willing to risk wide stops on small positions). In terms of possible supports, 80.00 represents a major psychological level, and not far beyond there 79.76 is where the pair bottomed out in 1995 –the last time we were down at such depressed levels. Plenty of supply is still lurking up above us; first up will be around 82.87 (break-out level), 83.15 former support, then 84.00 (5 Oct high), 84.64 (50-day moving average), 85.40 (24 Sep high), 85.90 (ceiling of supply since mid-August), 86.50 (5 Aug high), 86.90, and 88.07.

UsdChf After the scintillating news yesterday that USDCHF had dipped to new all-time lows of 0.9556, the pair actually spent most of yesterday squeezing higher towards 0.9710. Fortunately for us bears, that 0.9710 former support has been sufficient to contain the rally for now, and all still looks good for a continuation of the bearish trend. Selling on rallies like this still looks attractive to us, notable levels on the topside are 0.9740 (a vibration of the current downtrend channel), 0.9845 (last Friday’s high), then 0.9920 (26 Nov 2009 low). It’s looking increasingly unlikely that we see levels anywhere close to parity in the near term, but if we do then it would be a fantastic level to sell into, protected by resistance at 1.0120 (20 Sep high), 1.0185 (17 Sep ceiling), then 1.0278 (10 Sep high) and 1.0340 (last seen on 24 Aug). Our fundamental strategy view is looking for a year-end target of 0.9500, but really when you’re dealing with barren territory on the charts there really is no technical estimate for the final destination.

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