The first trading session after a non-farm payroll report, especially a disappointing one, historically tends to be the quietest in the month. However, investors do not have much time to diddle as the forex option market and their ‘vols’ are indicating that event risk lies ahead. Certainly the highlight of this week will be the new Fed head Janet Yellen’s testimony tomorrow. It’s the first in her new role, and a first time for many to hear her. To date, she has not been an active part of the speaking circuit like her colleagues. Capital Markets will welcome the opportunity to study her “tone and manner.” It gives all interested parties its first opportunity to see if Ms. Yellen is as dovish as they expect her to be, while also promoting a tapering back of the Fed’s bond-buying program.
Despite last Friday’s disappointing jobs report raising the stakes for a few, market consensus expects the Feds modest tapering path to remain in place. There is a subtle belief in the US recovery, and it remains anchored, despite one or two errant reports of late. Its supporters seem to expect the dreaded weather anomaly associated with NFP to eventually wither away, and be priced out. To others, Yellen’s primary mandate is to probably place an even greater emphasis on “rates remaining lower for longer.” Since the weak jobs report, fixed income dealers have collectively pushed the timing of the first Fed rate hike further out their curve, to the end of Q3 or early Q4, 2015.
The dollar and the 18-member single currency moves of late have definitely flatfooted a good percentage of this market. Last week, investors were expecting more of a dovish response from the ECB and Draghi himself instead of this “wait and see policy.” Investors positions have been relatively short the single-currency going into the February’s central banks monetary policy meetings – both outright and on the crosses. The twin combination of an inactive ECB and a disappointing jobs report has certainly put the squeeze on the weaker of these EUR short positions. For the time being, the EUR remains capped by its 1.3651 near term-resistance line. Currently its 55-DMA support remains steadfast, below the 1.35 handle at 1.3475. However, the law of gravitation will be making a nuisance of itself to the EUR shorts. The longer the EUR trades close to its outright highs will surely encourage further near term panic liquidation.
The Cable ‘vols’ for this Wednesday’s expiry are even higher than Ms. Yellen’s first testimony. Governor Carney at the BoE is expected to announce an overhaul to his forward guidance framework. Many expect UK policy makers to roll out forward guidance Part II with this Thursday’s UK inflation report. To date, the Governor and his fellow policy makers have misread the “true” strength of the UK economy, and misinterpreting the faster than expected decline in their economy’s unemployment rate. Last month Carney indicated that their forward guidance policy would need to “evolve” with changing circumstances. Now is that time. The UK’s unemployment level is about to hit +7% – the trigger point for the BoE’s to raise its benchmark rate. However, a “debt-sodden” economy could not manage an interest rate hike anytime soon. In fact, all the economic good that has occurred in the past 18-months would be quickly unwound. Will the BoE introduce a broad range of indicators as policy triggers? Or will they simply just lower the unemployment rate? Whatever the outcome, fixed income dealers will probably be pricing out the possibility of a rate hike this year –the BoE still remains favored to being the first developed country to hike rates. Depending what transpires this week, UK Gilts are preferred to rally while sterling is expected to underperform.
Many investors were expecting to take solace in gold’s direction after Friday’s NFP release. A disappointing print and the yellow metal was expected to have set its sights firmly on $1,300. What has transpired is that this market has a commodity that seems to be trapped in its 2014 range despite having reason enough to want to go higher. The macro buying that has pushed the “yellow metal” to the top of its trading range has more to do with tepid market short covering. For the metal to have any designs for a consistent higher price it requires a number of scenarios to transpire: risk-on (buy stocks), risk-off (Developed Market growth challenges) or further Emerging Market turmoil. What could happen at the upper price range without a break higher soon is that theses gold longs will finally become frustrated and want out. Gold prices are required to do a lot more to convince supporters interaction. Without it, the heard will want to escape.
Loonies Reprieve From Jobs Data