Are Strong NFPs Priced In?

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Market Drivers December 5, 2014

USD/JPY makes fresh highs as dollar mania rages
War of words heats up
Nikkei 0.19% Europe 1.55%
Oil $66/bbl
Gold $1203/oz.

Europe and Asia:
AUD Construction 45.4 vs. 53.4

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

USD/JPY continued to make fresh highs ahead of the US NFP report due later today climbing to 120.44 in mid-morning European trade as sentiment towards the dollar remained robust. The consensus view is that US NFPs will print at 231K – the tenth straight month above the 200K mark which would be the best string of job creation since 1994.

Anything above the 200K level will likely keep the dollar well bid as it will confirm the market expectations of a Fed rate hike sometime in Q1 of 2015. Traders will of course also look at other numbers in the report including the very important average hourly earnings for any signs that the pick up in labor demand is finally translating into income growth.

Yet even if data comes in line with projections USD/JPY may not rally much past these levels having already broken the key 120.00 barrier ahead of the event. The pair has come so far so fast that many specs have built large profits in the position and the natural inclination to sell on the news to lock in gains is likely to curtail any upside moves much beyond the 121.00 figure for now.

Another reason to be short term cautious here is that the Japanese authorities themselves may not want to see the yen weaken much beyond these levels ahead of the election later this month. Any further currency depreciation is likely to offset the positives to the export sector by making imported consumer goods more expensive for the average Japanese citizen. Much of the import costs have been absorbed by the drop in energy prices, but now further currency depreciation may be reaching the point of diminishing returns.

The euro meanwhile has been very quiet in pre-NFP trade while the war of words at the ECB has clearly escalated. Jens Widemann of BUBA was on the wires today stating that he would be highly uncomfortable with QE noting that the EU treaty rules out mutualisation of risks. The lines are now clearly set between Draghi and Weidemann and the future of EZ recovery may very well rest on how the conflict is resolved. If the ECB is unable to add further stimulus to the EZ economy the only hope for rebound in the region will lie with lower exchange rate and continued demand from US.

Today however, the price action will likely center on the NFP report, although if the numbers print relatively in line the reaction may be anti-climatic after yesterday’s turbulent session and currencies could see some technicals adjustments as traders bank profits ahead of the weekend.

Boris Schlossberg
Managing Director

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