It’s that time of the month – employment Friday. North America gets to see how many individuals are gainfully employed and who are contributing to the bottom line in the US and Canada. Of late, NFP and Canada’s employment releases have been inconsistent, softer and downright disappointing. The belief that the recent economic misfires are weather related is not a tough pill to swallow, but some of the specifics within some of these releases certainly pre-dates the worst of the weather and its this that has suspicious minds on edge. And reason enough, particularly for US non-farm payroll, that the stakes for this morning announcement could not be higher for many investors’ positions. Any indication that last month was back on track will be welcomed euphorically by the market – equities to record highs, yields to back up and the dollar anointed. However, any further weakness (not weather shrug-able) will be very hard for market bulls to deal with.
One would have assumed that with this weeks disappointing US February ADP report coupled with a weaker non-manufacturing index job component investors would see changes in today’s employment forecasts. The reason why “dealers” have not widely conformed to a change is that the ADP headline has been +30-40% above the corresponding NFP data for months, making this week’s revisions in many people eyes a “catch-up exercise.” The miss in the first two months of this year are being marked down to our old foe – the weather. The latest market poll amongst the top dealers revealed that +40.5% voted for a number between +130-170K, +34.9% for below +130k and +24.6% for above +170k. First pass over would suggest that Capital Markets is most vulnerable to a “robust” number.
As the main event draws near the mighty dollar is maintaining its soft tone heading into the March non-farm payroll data. The 18-member single unit, the EUR, is trying to seek out fresh three-month highs with key resistance remaining at the highly publicized six-year downtrend line of 1.3890. Now that the market is realizing that it’s near impossible that the Fed would ease their modest pace of tapering, they also seem to be coming around to the idea that Draghi and company at the ECB will not be cutting rates or taking more simulative action any time soon. Draghi’s relatively upbeat press conference supports that. Notwithstanding the majority expecting NFP to print below +150k the “bold long” EUR positioning would suggest that the market is comfortable to run the position through the data. For 2014, many have assumed that the dollar would be the standout currency – it’s to garner the bulk of its support from interest rate differentials. However, global investors have poured into Euro-zone periphery bonds and equities and the only thing that was holding back the EUR was a dovish ECB expectations contrasting with a hawkish Fed. If this relationship is broken, investors could see the EUR sustain a much higher move (pushed on by many of those long-dated EUR ‘short’ positions). It’s not going to take much to trigger those €1.39 and €1.40 option barriers in the medium term.
Even the Fed would not be surprised with a soft jobs report this morning. Fed’s Lockhart this week indicated that it would be reasonable to anticipate a soft jobs report for February given the “winter’s wrath.” It was not a surprise that he also voiced support in continuity of the pace of taper, suggesting only a serious drop-off in activity would merit change. Plosser sang from the same tune book, stating “the bar to change the pace of the taper is high, even though the near-term trend of economic growth has been reduced.” Both individuals agreed that it would probably take a couple of months before weather-related factors are filtered out of US economic data.
Once today’s economic event risk has been digested by investors, they will be expected to switch gears back to Ukrainian/Crimea geo-political concerns – the Ukraine press is speculating that this weekend could see a “high chance” of an assault by Russian troops on Ukraine bases in Crimea.
EUR/USD – Draghi Stands Pat, Euro Shoots Higher
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