How Will Currencies React to a Strong NFP?

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Market Drivers for March 08, 2013
USD/JPY breaks above 95.50 as uptrend accelerates
Trading quiet ahead of the NFP
Nikkei 2.64% Europe 0.72%
Oil $91.58/bbl
Gold $1658/oz.

Europe and Asia:
JPY GDP 0.0% vs. -0.1%
JPY Trade Balance 0.36T vs. 0.11T
CHF CPI 0.3% vs, -0.3%
EUR German Industrial Production n/a

North America:
USD Unemployment Rate 8:30
USD Change in Non-farm Payrolls 8:30
USD Average Hourly Earnings All Employees 8:30
CAD Housing Starts 8:15
CAD Unemployment Rate 8:30
CAD Net Change in Employment 8:30
CAD Part Time Employment Change 8:30
CAD Participation Rate 8:30

USD/JPY has continued to power higher in Asian and early European trade as the pair broke above the key 95.50 level on expectations that today’s US Non-Farm Payroll report will be stronger than consensus expectations. This weeks positive string of economic data has convinced the market that US is now vastly outperforming the rest of the G-3 and has attracted further flows into the greenback.

The rest of the major have remained relatively quiet as is typical on pre-NFP day with EUR/USD trading either side of 1.3100, cable rebounding after testing 1.5000 again and Aussie showing some weakness in Asian trade after Chinese trade balance data showed that imports contracted by by -15.2% raising concerns that demand for Australia’s coal and iron ore is waning.

After a series of better than expected indicators, the market is now primed for a stronger print in the NFPs. The consensus call is for 173K new jobs roughly matching January’s 161K print. However, the employment component of ISM services report, as well the ADP number suggest that NFPs could be closer to 200K. The surprisingly sharp drop in weekly jobless claims also supports the view that US labor market demand is fairly robust.

Given those conditions sentiment is clearly skewed to the upside so unless NFPs prints at 225K or better, the reaction may be fairly limited. Still it maybe worthwhile to examine a few possible scenarios for today’s marquee event.

USD/JPY is the prime focus for the event today and with the pair now at fresh highs there is little resistance to the upside, so a solid NFP print could push the unit to a test of 96.00 as the momentum rally continues to roll on. If the data proves positive, analysts will now start talking about 100 USD/JPY rate in the foreseeable future.

EURUSD is a much more complicated case as the pair has now ceased trading on risk flows and could actually drop lower if the NFP number posts a strong gain. Yesterday’s relatively upbeat presser by Mario Draghi provided the euro with a temporary lift, but as we noted earlier, the rally may prove to be fleeting if EZ eco data does not improve relatively soon. Still the pair has very strong support at the 1.2950 level and may not decline much unless that handle is broken.

GBPUSD remains in a steep downtrend and although it has been able to find support below the 1.5000 level it may finally crack hard if the US payroll number beats the estimate. Yesterday’s relief rally post the BOE meeting has essentially worn off and as the market focuses on the increasing disparity between US and UK growth differentials cable is likely to see further downside pressure.

USDCAD is perhaps the most interesting pair to examine as both Canadian and US employment numbers will be released at the same time. The loonie has weakened markedly against the buck with USDCAD rising to 1.0300 level as US economy continues to outperform Canadian results. Last month’s horrid -21.9K print along with a persistently dovish BOC has pushed USDCAD to fresh yearly highs.. If the divergence continues and worse – if Canada records second consecutive month of job losses while US prints in the neighborhood of 200K USDCAD could take out the 1.0400 level and ultimately target 1.0500 as speculative flows move south of the border.

Boris Schlossberg
Managing Director

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