NFP herding us to No Mans Land

Better industrial data out of China and the surprising ISM print in the US has every, already confused trader, becoming ‘more lost’ in whatever convictions they have left. At least we have the NFP crap-shoot still to come, that is bound to surprise. We may give up all we have gained in a heart beat this week and we would be none the wiser! Interpreting trading strategies is like a new form of ‘ping-pong’, back and forth with risk appetite. This morning the EUR remains king and has managed to extend its gains in the wake of a well received French and Spanish auctions. The Euro-zone 2nd Q GDP revision to +1.9% vs. +1.7% also helps the currency plight. All we have to do now, is get over this morning’s US claims and pending home sales an hunker down for tomorrow’s NFP.

The US$ is weaker in the O/N trading session. Currently it is lower against 12 of the 16 most actively traded currencies in a ‘subdued’ trading range in the O/N session.

Forex heatmap

The word unemployment gives one a headache in the US. Yesterday’s ADP report disappointed with renewed job losses (-10k vs. +20k), showing a trend reversal that had been in place over the last quarter. We should have been well prepared for this after noticing jobless claims picking up steam since July. Even other recent indicators suggest that US employment will follow further in a lagged fashion. Bears will have us believe that the release will support the call for a ‘very’ mild private sector job growth in tomorrow’s NFP print. Already analysts have revised down private employment from +48k to ‘0’. Historically, ADP has always had issues in terms of translating into NFP swings. Digging deeper, the revisions were mild, with the previous month losing -5k to +37k. Most of the losses were recorded in the in the goods-producing sector (-40k, m/m), while the services sector happily added jobs (+30k). Within the goods-producing sub-sector, employment in manufacturing fell -6k (second consecutive monthly decline). The other main sub-sectors, construction and finance fell -33k and -5k respectively. It’s worth noting that medium and small-size businesses reduced their workforce by -5k and -6k each. On the services side, small businesses happened to add +15k jobs. Tomorrows NFP looks like it wants to throw the cat amongst the pigeons!

It’s surprising to see the US ISM report discounting the ADP private manufacturing job loss trend (-40k). Last month, manufacturing expanded at a faster pace than had been expected (56.3 vs. 53.2), as factories added workers and beefed up production. With the data gravitating further away from the ‘contraction’ median, the initial response by the market had investors believing the rebound in the ISM data negates some of the market concerns that the global economy will slow as governments withdraw stimulus measures. Digging deeper, the production sub-category index increased for the first time in 4-months, while the employment indicator happened to register its strongest print in 37-years. Analysts expect production to taper off on the back of future weaker bookings being recorded, while backlogs ease further. All eyes will become fixated on tomorrows NFP report.

The USD$ is lower against the EUR +0.10%, CHF +0.41% and JPY +0.45% and higher against GBP -0.43%.The commodity currencies are weaker this morning, CAD -0.13% and AUD -0.38%. Fact, 2/3rd of analysts expect Carney to hike next week. Fact, futures are pricing in a +40% chance of the BOC tightening. It’s probably one of the toughest calls over the last decade. A string of disappointing Canadian data and a darkening global outlook have weighed heavily on the market’s conviction for a Sept. hike. Yesterday, the loonie did an about face and aggressively appreciated against its largest trading partner as risk appetite once again emerged, pushing global bourses and commodity prices higher on the back of stronger manufacturing data out of China and the US. Last month, the CAD happened to post one of its worst performing months in over a year, falling -3.5% vs. the dollar. The dollar has now capped a triple top at 1.0675 and will prove a formidable support level for the currency again. Canada is not immune to weaker data reported south of its borders. It is only natural that growth and interest rate sensitive currencies would experience some volatile moves on changing risk attitudes. Expect dealers to tighten up their position heading into NFP tomorrow.

The AUD fell in the O/N session from its three-week high after a government report showed the trade surplus shrank in July more than the market had been anticipating (1.89b vs. 3.11b). The currency happened to depreciate against all of its 16 major trading partners as the countrys export data also fell to its lowest level in 7-months. On the whole, concerns that global growth is slowing has damped investor appetite for higher-yielding assets again. Ping-pong is like a new form of trading strategy! Back and forth with risk appetite. The currency has underperformed against all of its major trading partners and is expected to do so until there is a new Government formed. The commodity rich currency is not isolated, as other growth sensitive currencies are suffering the same fate. Government data has also happened to put a lid on the recent rally. Net result traders are adding to their bets that the RBA will leave interest rates unchanged for the next 12-months. Interest rate differentials play a big part of the currency’s attractiveness. Perhaps all this will change with tomorrows NFP print (0.9088).

Crude is higher in the O/N session ($74.01 up +10c). Crude prices advanced yesterday after manufacturing data in both the US and China (the world’s biggest energy-consuming countries) accelerated at a faster pace than expected this month. The commodity happened to maintain its gain after the weekly EIA report revealed an unexpected decline in supplies of distillate fuels. Distillates (heating oil and diesel), fell -739k barrels to +175.2m. The market had been expecting the inventory to increase by +1.15m barrels. Inventories of crude itself advanced +3.42m barrels to +361.7m Supplies were forecast to climb by +1.2m. On the face of it, the weekly report build is market bearish, but investors happily ignored the data as they found solace from the manufacturing data showing new signs of growth. How long is this sustainable? Perhaps NFP will bring even more surprises? In reality, oil hovers just above this month’s low, on concerns that weaker economic data will push the US into a double-dip recession. The market should be wary that the underlying situation has not changed, the fundamentals remain very weak, demand does not look good and stockpiles of crude and products remain at a record high. Speculators remain better sellers on up-ticks in the short term.

Gold prices happened to print a 2-month high earlier this week and yesterday price action was little changed despite global equities soaring on the back of stronger manufacturing reports. The uncertainty of recent data has had investors contemplating boosting their demand for the commodity as a safe heaven. For the month of Aug., bullion has appreciated just under +5%. All last week investors have sought sanctuary in the safer heaven asset classes on the back of weaker equity markets. The market would not be that surprised to see some sort of technical pull back supported by profit taking selling as investors embrace more risk on the back of stronger data. Investors are trying to put there cash somewhere more solid on mounting evidence of a US economic slowdown. Speculators again are supporting the various safe heaven assets on pullbacks, avoiding risky assets due to uncertainties in the markets. With a genuine fear for global growth, by default, should boost the demand for the metal as a protector of wealth in the grand scheme of things. With treasury yields expected to remain close to their lows, could promote a quickening inflation rate, which would promote pushing commodity prices even higher. The opportunity costs of holding gold are low due to falling interest rates ($1,250 +$1.50c).

The Nikkei closed at 9,062 up +136. The DAX index in Europe was at 6,066 down -17; the FTSE (UK) currently is 5,360 down -7. The early call for the open of key US indices is lower. The US 10-year backed up 7bp yesterday (2.57%) and is little changed in the O/N session. Treasuries plummeted for the first time in three days on the back of some surprising manufacturing data out China and the US. The curve had become too rich and the overbought asset class was due for some sort of correction. Yesterday’s ISM data provided the ammunition to widen the 2’s/10’s spread to +209bp. Treasuries also declined before the government announces today the sizes of three debt sales next week (3’s, 10’s and long bonds-market anticipates $67b). Despite product becoming expensive on the curve, NFP uncertainty has debt better bid on pullbacks.

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