Typical Non-Farm payroll makes the EUR and Dollar flounder

There’s been a willingness to want to edge away from the dollar and take a bit more risk after some of the data we witnessed from Asia and Europe in the O/N session. However, a holiday shortened week and a NFP to consider, has dealers paring some of their positions for the ‘surprises’ whether they want to or not. Concerns that ‘payrolls’ may disappoint tomorrow has the ‘majors’ trading in a narrow range. Even the Euro-zone index climbing to a 40-year high (56.6 vs. 54.2) has been offset by Greece’s debt problems looming large. The JPY has not benefitted from a favorable Tankan report. Now that their ‘year’ is over, Japanese investors are taking foreign positions at the start of the New-Year. Even China recorded a strong PMI reading (55.1 vs. 52), dragging global commodities higher. Again, EUR/CHF has managed to record new lows after stronger than expected Swiss data (PMI 65.5 vs. 58.7). Will we ever get to see the SNB react?

The US$ is slightly weaker in the O/N trading session. Currently it is lower against 10 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Forex heatmap

Yesterday was a data laden day that is creating some awkward questions. Surprisingly, the private payroll ADP report greatly disappointed the market (-23k vs. +40k). Some traders have ‘reasoned’ away the headline print, while others are scrambling to readjust their NFP expectations for tomorrow. Even the revisions were adjusted negatively. The higher expectations (+300 to +400k) may now be pushed back down to medium estimates of around +200k. Analysts do expect the payroll number to come in strong on census hiring. On the flip side, there has not been a ‘strong’ correlation of late between the two announcements. The ADP report excludes the self-employed while NFP does not. Digging deeper, most of the weakness again came from the ‘goods’ producing sector (-51k), small businesses in particular (50%), while the manufacturing sector lost only -9k jobs. Again, countering the weakness was the service sector, creating +28k new positions, with small and medium sized enterprises contributing +85% of the gain.

There is no denying that US Factory orders are supporting a strong ‘V’ shape recovery. Yesterday’s headline (+0.6) and specifically the revisions (+2.5% vs. +1.7%) are hitting the ball out of the park. Last month business orders managed to return to strength. Analysts use the core-capital goods orders (ex-aircraft and defense) as a proxy for business investment and month-over-month it has grown +2%. It seems that ‘obsolete capital for the current expansion is being replaced regardless of excess capacity considerations’. Digging deeper, shipments were a tad softer, but a stronger new-orders print points to an optimistic few months ahead. The unfilled orders also remain supportive of shipments growth. Inventories climbed for the second straight month (4 out of 5). Surprisingly, the inventory-shipments ratio remains at 1.29 (three months on the trot), providing some encouraging signs that we have reached a bottom. Interestingly, the pre-crisis watermark was 1.20. Inventories look like they will be supporting GDP growth in the 1st Q. Not helping investor confidence was the disappointing Chicago PMI print yesterday. It fell to 58.8, from a five-year high of 62.6 last month.

The USD$ is lower against the EUR +0.00%, GBP +0.33%, CHF +0.26 % and higher against JPY -0.13%. The commodity currencies are stronger this morning, CAD +0.43% and AUD +0.12%. Yesterday’s Canadian m/m growth surpassed all expectations (+0.6% vs. +0.5%), signaling a robust recovery with key elements pointing towards a compounded growth rate of almost +8%. It appears that growth rates are coming in much stronger than Governor Carney and his policy makers expected. In Jan. they pegged 1st Q growth at +3.5%, the market is looking for something in the range of +5.5%. It seems that the manufacturing, wholesaling and construction sub-sectors are leading the way. With data like this, it’s difficult not to love the loonie. Even commodities are lending a helping hand despite equities floundering. Maybe it’s the calm before the storm, the storm being NFP tomorrow. Earlier this week it was nice to see the market weed out the ‘weaker domestic longs’. Even with all the other global ‘noise’ the currency is outperforming many of its G7 members. The loonie remains a good news story with strong fundamentals. To date the USD rallies have been shallow and are met with strong resistance. The trend remains your friend.

Weaker fundamental data out of Australia last night has been able to slow the pace of acceleration of their domestic currency. Firstly, the Australia’s trade deficit (-1,92b vs. -1.34b) widened more than analysts expected last month, as ‘miners imported equipment needed to meet surging Chinese demand for commodities’. Secondly, the manufacturing index slipped -3.6 ticks to 50.2 on fewer new orders for consumer goods in Mar. A weaker expansion among manufacturers may give Governor Stevens the ammo to ‘slow the pace of interest rate increases after he boosted borrowing costs four times in the past five meetings’ next week. It seems that the Cbank is getting the job done as the interest-rate increases are cooling domestic demand. On the face of it, last night numbers were woeful for positions relying on further tightening soon. The market should expect the AUD to remain under pressure, especially after the currency outperforming in the last week in anticipation of ‘this’ hike (0.9172).

Crude is higher in the O/N session ($84.30 up +54c). There are a number of reasons that have kept crude prices afloat this week. Firstly, month-end dollar selling has favored most commodities. Secondly, Japan’s Tankan report of business sentiment last night showed its fourth straight quarter of improvement. Gains yesterday were slightly pared after the weekly inventory print. The EIA report showed that crude stocks rose by +2.9m barrels to +354.2m last week. The market had been expecting an increase of +2.4m. The surprising factor in the report was that gas inventories recorded a modest gain, unlike the previous couple of weeks. Stocks increased +313k barrels to +224.9m last week. A -1.85m barrel decrease was forecasted. This week, we have seen the Euro-zone economic sentiment increasing and the US consumer spending rising, factors that are pressurizing bears from their course of action. Other reports showed that OPEC’s crude-oil production slipped from a 14-month high last month. Technical analysts are now eyeing the $85 resistance level.

It was the end of the month and the end of another quarter. Gold again climbed yesterday, capping off the 6th consecutive quarterly gain as investors sough an alternative investment to the dollar. Weaker fundamental data coupled with month-end dollar selling requirements favored commodities yesterday. For most of last month, investors sought sanctuary in the dollar as the EU hummed and hawed over Greece. This ‘debacle’ remains on the radar. However, surprisingly weaker private jobs numbers ahead of the ‘daddy’ of all numbers, the NFP, has the greenback on the back foot temporarily. Tomorrow’s release may conjure up a new trading scenario. Fundamentally, it’s been expected that the ‘yellow metal’ would find stronger traction as investors seek an alternative to an ‘on going weakening’ of the EUR and low interest rates. The dollar’s direction remains the strongest indicator to wanting the metal or not ($1,117).

The Nikkei closed at 11,244 up +154. The DAX index in Europe was at 6,201 up +48; the FTSE (UK) currently is 5,718 up +39. The early call for the open of key US indices is higher. The US 10-year backed up eased 1bp yesterday (3.84%) and is little changed in the O/N session. Treasury prices could not contain themselves after the US data yesterday. A disappointing ADP report, coupled with an unexpected Chicago PMI print, had investors seeking safety in the FI asset class. The market is now anticipating that the labor market recovery will be slow, despite a large percentage of investors anticipating a strong NFP print tomorrow. Using ADP as a leading indicator for pay-rolls is not necessarily a good thing. As of late, there has been a weak correlation between the two. Today, the Treasury is scheduled to announce its auctions amounts for next week (3’s, 10’s and long bond). As we witnessed last week, government supply has been a bearish factor for bonds. Traders will want to make room to take down the issues.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell