Dollar Dominates as NFPs on Deck

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Market Drivers January 4, 2013
FOMC minutes inspired Dollar rally continues into Europe
UK PMI Services misses suggesting neg. Q4 GDP
Nikkei up 2.82% Europe -0.17%
Oil $91.86/oz.
Gold $1636/oz.

Europe and Asia:
AUD AiG Performance of Service Index 43.2 vs. 47.1
EUR Eurozone Purchasing Managers Index Services 47.8 vs. 47.8
EUR Eurozone Consumer Price Index Estimate 2.2%
GBP Purchasing Managers Services 48.9 vs. 50.4

North America:
USD Change in Nonfarm Payrolls 8:30
USD Change in Manufacturing Payrolls 8:30
USD Unemployment Rate 8:30
USD Underemployment Rate 8:30
USD Change in Household Employment 8:30
USD Average Hourly Earnings All Employees 8:30
USD Factory Orders 10:00
USD ISM Non-Manufacturing Composite 10:00
CAD Net Change in Employment 8:30
CAD Unemployment Rate 8:30

The FOMC inspired dollar rally continued to roll on in Asian and morning European trade today with USD/JPY hitting fresh yearly highs at 88.33 while euro staved off several assaults to test the 1.3000 level. The surprisingly hawkish tone of the FOMC minutes which suggested that some members wanted to curb the bond purchasing program as early as this year, sent the dollar soaring in afternoon North American trade yesterday and the momentum continued especially when Tokyo traders came back to their desks after several days off for New Year’s holiday.

On the economic front the PMI data from the region and German retail sales showed some stabilization and improvement. EU Final services PMI data printed at 47.8 versus 47.8 last but both Italian and Spanish services PMI reading improved to 44.3 from 42.7 and 45.6 to 45.1. Although the data remains well below the 50 boom/bust line, the latest readings from the region were second best monthly results in more than a year indicating that the service sector in the periphery economies is stabilizing and may be starting to recover.

Meanwhile German Retail sales beat expectations rising by 1.2% versus 0.9% eyed. This was the second highest rise in more than a year and a good sign that the German consumer remains relatively confident about the economic conditions at home. Overall German retail sales fell in 2012 by approximately 0.1%-0.3% according to the statistics office.

In UK however, the news was not nearly as bright with PMI services report missing its mark as it printed at 48.9 versus 50.4. This was the first contractionary reading in nearly 2 years and suggests that the UK economy is likely to triple dip into a recession in Q4 of this year given the service sectors prominence in GDP calculations.

Cable drifted lower in the aftermath of the release with shorts eyeing the 1.6000 mark as the day proceeds. EUR/GBP which has seen a swift and vicious correction over the [past few days has now found support at the 8100 level and given the weak economic data out of UK could rally towards the 8150 level as cable is likely to underperform for the rest of the day.

In North America the focus turns to marquee report of the week with US NFPs due at 13:30 GMT. The market anticipates 150K new jobs, although the much better than expected ADP fata yesterday stoked speculation that the number could exceed 170K. The best forecaster of NFP data – the ISM Services report – will not be released until after the NFPs thus depriving traders of their most reliable data point. Still preliminary reports suggest that labor demand remains relatively robust in US and if the NFPs print 170K or better the pressure on the Fed to wind down its QE program will accelerate, helping to fuel the dollar rally even more.

Boris Schlossberg
Managing Director

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