Today’s NFP – What Will Make the Dollar Rally?

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Market Drivers for September 05 2014

Euro stabilizes post Draghi smash
Market awaits NFPs

Nikkei -.05% Europe -.07%

Oil $94/bbl

Gold $1264/oz.

Europe and Asia:

AUD AIG Construction 55 vs. 52.6

EUR GE IP 1.9% vs. 0.5%

EUR GDP 0.0%

North America:


CAD Employment 8:30 AM

CAD Ivey PMI 10:00 AM

The markets were characteristically quiet ahead of the US NFP report due later today with EUR/USD finding some support around the 1.2950 level after yesterday’s drubbing post ECB rate decision. The single currency lost more than 200 points – its biggest single day decline in nearly 3 years after Mario Draghi surprised the market with a rate cut and the promise of an ABS purchase program.

The dramatic shift in policy in ECB was a response to the deteriorating economic conditions in the Eurozone and is intended to achieve two goals – increase credit flows to SME businesses to stimulate investment and spending and lower the exchange rate to boost the export sector. On the second front the ECB may already be seeing some evidence of improvement as the latest data from German Factory orders and Industrial Production was markedly better than expectation. Today’s German IP printed at 1.9% versus 0.5% indicating that EZ largest economy continues to see stable demand.

With euro now consolidating its losses the currency markets will now turn their attention to US Non-Farm payrolls to see if the widening gap between ECB and Fed monetary policies will increase further and provide the greenback with another boost higher. The focus today will be on wage growth and labor participation rates. The market all but expects another 200K reading in jobs, but dollar bulls will need to see if the recent uptick in employment is finally translating into increase in wages which would provide the Fed with confidence to begin the credit tightening process.

Although many critics of the Fed have called for the central bank to begin the tightening process now given US GDP growth rate of 3%, US monetary officials are keenly aware that US economic expansion has been woefully uneven with almost all of the gains in income going to top 10% of the earners. The Fed is clearly waiting for the broadening of growth benefits to the wider workforce before it considers a change of posture.

The currency market therefore remains in a wait and see mode and any disappointment today could create a nasty correction in the dollar which has been bid up fairly well this week against most of the major with exception of comm dollars which continue to attract carry trade flows especially from European fixed income investors who have seen yields at home shrink to record lows.

A miss on the NFPs could push EUR/USD back above 1.3000 but more importantly could scuttle the recent rally in USD/JPY. The pair has been trying to break above the 105.00 level all week long but has met heavy selling at 105.50 level several times. A break above 106.00 figure could signal the start of a fresh upleg in USD/JPY, but a failure at 105.00 would create another range top for the pair and could trigger a steeper round of profit taking on any disappointment by the bulls.

Boris Schlossberg
Managing Director

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