Market Drivers Feb. 5, 2016

AU Retail Sales 0.0% vs. 0.5% eyed
Brexut poll 46% leave 35% stay
Nikkei -1.32% Eurostoxx 0.48%
Oil $32/bbl
Gold $1157/oz

Europe and Asia:
AUD Retail Sales 0.0% vs. 0.5%
EUR Factory Orders -0.7% vs. -0.3%

North America:
USD NFP 8:30
CAD Employment 8:30

It’s been a typically quiet pre NFP night in FX trade as markets essentially remained motionless ahead of the key event of the week – the US NFP report due 13:30 GMT today.

The one exception was the pound which wobbled in early morning London dealing on latest polls that showed 45% of respondents willing to leave EU while only 36% wanted to stay. The near 10% gap is a troubling sign especially given the generally positive rhetoric coming out of Brussels on the latest round of negotiations.

Cable quickly swooned to test the 1.4500 level but then just as quickly rebounded to 1.4550 as dip buyers appeared. With nearly 20% of the vote undecided the market hopes are that the stay vote will eventually prevail, but the danger of Brexit remains very real and could cause havoc not only GBP/USD trade but in EUR/USD trade as well as it could open the way for general EU fracture.

For now the markets are likely to focus on the latest US labor data readings and as our collegue Kathy Lien noted, “There are many reasons for Friday’s payrolls report to miss not the least of which is that a correction is expected after last month’s surprisingly strong report. Economists are looking for job growth to slow to 190k but based on other labor market related readings, the level of job growth could be even lower. Taking a look at the list below there are many red flags, the most important of which are the sharp declines in the employment component of the two ISM reports. This subcomponent of the non-manufacturing (service sector) index matched its 1 year low.”

Any miss on the NFP data could send the dollar even lower and create a key test for USD/JPY which have been able to hold above the 115.00 level for nearly two year. That pair has been tested nearly 5 times since then and a break there would essentially be the nail in the coffin for the long USD/JPY trade confirming that the pair set a multi year top. With 10 year rates at 1.84% and the buck under assault the markets are coming to the conclusion that the Fed normalization process has basically turned into a one and done.

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