Will NFPs Save the Buck?

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Market Drivers Dec 4, 2015

AU Retail Sales bit better
Market awaits NFPs
Nikkei -2.18% Eurostoxx -0.30%
Oil $41/bbl
Gold $1059/oz

Europe and Asia:
AUD Retail Sales 0.5% vs. 0.4%
EUR GE Factory Orders 1.8% vs. 1.3%

North America:
USD NFP 8:30

CAD Employment 8:30

Currencies settled into their usual pre-NFP stall with dollar slightly better bid in Asian and early European trade with markets keenly focused on the November US employment data that could tip the Fed rate hike decision later this month.

After yesterday massive short squeeze that saw the euro register its biggest gains in more than six years, the pair eased today dropping to a low of 1.0858 before finding some support. With Mario Draghi failing to deliver any additional QE the market ramped higher as later euro shorts scrambled to cover their positions. Yesterday’s move was emblematic of a typical misalignment in positioning but we doubt that it is a start of any new sustained euro rally given the still very aggressive easy monetary policy practiced by the ECB.

Still today’s market action will be very much driven by the events on this side of the Atlantic as traders will pore over jobs numbers and most importantly the wage data. The market is anticipating a reading of 200K and as long as the data prints within 20K of that number the impact should not be major.

All of the pre-NFP data has been mixed with both ISM reports especially weak suggesting that US economy has clearly stalled a bit over the past month. However, employment is a lagging indicator and there may still be enough momentum in the US economy to post yet another decent month of job gains. The ADP report which came out on Wednesday and which has been much better at handicapping the NFP numbers lately, showed a gain of 217K in private payrolls. If the ADP data proves correct, the news should provide a modicum of relief for badly bruised dollar bulls as it will assure the market that the Fed will tighten at the December meeting.

Still as many analysts have pointed out the preponderance of risks lies with dollar bulls. Any miss in the NFP numbers and the market could go into a tailspin as it begins to price in the prospect of yet another possible delay from the Fed. Ms. Yellen and company are in unenviable position of having to normalize policy just the economic data is faltering and the manufacturing sector moves into a recessionary territory. Any serious miss in the NFPs and worse any slowdown in wage growth will put enormous pressure on Fed to hold and a hike will increasingly begin to look more like a political maneuver rather than sound economic policy.

Therefore the EUR/USD remains vulnerable to further short squeezes and could push all the way to the 1.1100 level if the US data misses.

Boris Schlossberg
Managing Director

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