Will NFPs Destroy the Dollar?

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Market Drivers for June 7, 2013
AUDUSD remains on back foot in Asia
USDJPy seesaw with Nikkei ahead of NFP
Nikkei -0.21% Europe 0.37%
Oil $95/bbl
Gold $1410/oz.

Europe and Asia:
AUD AiG Performance of Construction Index 35.3 vs. 35.2
JPY Leading Index 99.3 vs. 98.6
EUR German Trade Balance 17.7B vs. 17.2B
EUR German Industrial Production
GBP Trade Balance

North America:
USD Unemployment Rate 8:30
USD Change in Non-farm Payrolls 8:30
USD Change in Private Payrolls 8:30
USD Underemployment Rate 8:30
USD Average Hourly Earnings All Employees 8:30
USD Two-Month Payroll Net Revision 8:30
USD Consumer Credit 15:00
CAD Unemployment Rate 8:30
CAD Net Change in Employment 8:30

High beta currencies were subdued in morning European trade ahead of the key US Non Farm payroll report due later today at 12:30 GMT. Both the euro and pound gave back some of their gains from yesterday’s meteoric rise, while Aussie remained under pressure slipping below the 9500 figure once again.

In Asian session trade USD/JPY once again proved to be the most volatile pair as it followed the up and down movements of the Nikkei at one time dropping to within a few pips of the 95.50 level. The pair settled down however returning to 96.50 after the Nikkei ended up just mildly lower for the day.

The volatility in USD/JPY has been astounding over the past several days as it has correctly significantly from its swing high of 103.70, but having now dropped towards the key 95.00 figure it may finally find some support as long term investors come in at these levels. The drop in the pair has been driven by the volatility in the Nikkei and the growing realization by investors that the Fed may not taper its QE policy anytime soon, given the weakness in US data.

Indeed the sentiment has turned so negative towards the dollar over the past several days that much of downside in NFPs may already be discounted. If the payroll number prints anywhere above the 110K level the reaction in the market may be one of relief rather than disappointment as fears dissipate.

There is no doubt that US economic activity has slowed over the past several months, but further dollar weakness will only occur if today’s data suggests something more sinister – that the US economy may be starting to contract again. The prospect of such an outcome appears to be unlikely given the relatively steady rate of jobless claims which show that the labor markets continue to see a modicum of demand.

The dollar may therefore stabilize and perhaps even rebound if the NFPs today prove relatively benign. However, if the number prints significantly below the 100K level the greenback could see massive downside risk with USD/JPY possibly dropping through the 94.00 level while EUR/USD will likely push through the 1.3300 resistance and cable through 1.5700 mark. With sentiment already skewed against the greenback, seriously bad news could trigger massive momentum moves which will likely be exacerbated by further tripping of stops.

In short today’s report could prove to be one of the more significant economic data points in recent history and could make for a very volatile North American session as the trading week comes to a close.

Boris Schlossberg
Managing Director

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