What Will the Dollar Do after NFP?

  • Market is dollar bulled up ahead of NFP
  • Consensus looks for +250k payroll print
  • U.S unemployment rate expected to improve
  • An NFP miss or consensus to hurt dollar

There is no doubt about it, the dollar is king. There are many positives supporting it whether it’s U.S. growth, rate divergence, an upbeat Federal Reserve or jobs, are all making U.S. assets attractive and a rising U.S. dollar adds to that appeal. It seems that the market consensus believes that we are in the early stages of a secular bull market for the U.S. dollar. The midweek Federal Open Market Committee minutes confirmed that if the labor market continues to heal, then the Fed is likely to raise rates in the middle of the year even as they remain “patient” on doing so. Most analysts say higher rates are likely to happen even if there is little progress on inflation.

Despite the one-way traffic flow and after a decent start to the new year and a strong outlook for 2015, the USD is primed for some very short-term profit-taking. Today’s nonfarm payrolls (NFP) data could be the catalyst that will push investors to take some profit off the table on this one-directional and certainly most crowded of trades: being “long” USD across the majors, especially against the EUR. The lack of consolidation or any meaningful retracement by the USD thus far this year could have the dollar underperforming by day’s end no matter what this morning’s payrolls print happens to be.

Contrarian Trading is Expensive

“Buy the rumor, sell the fact” is one of the first lemming trades that dealers get to learn on trading desks. Another is to look for the market’s pain threshold, and then make it pay by staying ahead of the pack. Being a contrarian trader can be rather expensive. More often than not, one is required to have rather deep pockets to stay true to their convictions, as speculating against the natural flow is never easy. Most successes come more with the timing of the trade.

This market is definitely “bulled” up, with a higher percentage of investors leaning on another big number, not as strong as last month’s print (+321k and +5.8%), but bigger than the average monthly gains for last year (+241k). The market consensus is predicting a +250k print with a slight improvement to the unemployment rate to +5.7%. Beating consensus will obviously favor the dollar again, especially against the EUR and interest-sensitive currencies.

If the NFP Beats Consensus

Looking at the EUR International Monetary Market futures positions, the data suggests that there is room for the short positions. EUR shorts are still -15% below last year’s peak and -30% below the 2012 record. The obvious risks from Greece exiting the eurozone, and the European Central Bank meet on January 22, have been able to keep rebounds relatively weak. The lack of short-EUR positions would suggest that investors couldn’t afford to wait on a corrective future EUR bounce to speculatively sell. Being overtly bullish, the USD index is at a decade high on a Friday afternoon with no profits taken off the table and with many strategists looking for a floor, possibly because of the major rebounds from €1.18-1.20 in 2010 and 2012. It could cause a whiplash effect by day’s end.

Do not be surprised to see the USD initially find support and then experience an afternoon retreat. The biggest and perhaps only danger for dollar bulls is purchasing offside USDs that hurts the position average. Watch what central banks are doing. On the last go-around in 2010/12, they were selling USDs to diversify, but now they are buying to replenish reserves spent defending local currencies. The dollar trend remains strong, but at historic highs, it requires patience and massaging of position averages.

If the NFP Is Softer-than-Expected

Against the EUR, the dollar is up +2.2%, but a slower-than-expected December report could slow the USD’s rise temporarily. An underwhelming report, less than +200k print, could easily kick-start some aggressive profit-taking. The USD weakness will be particularly noted against interest-sensitive currencies such as JPY, EUR, and CHF, but the moves will be brief as the trend of better U.S. data and divergent monetary policy will continue to support the greenback in the coming months. There are many EUR sellers that have missed this week’s move and are hoping for a weak number to get that EUR rally to sell again.

There is no doubt about it, the dollar is king. There are many positives supporting it whether it’s U.S. growth, rate divergence, an upbeat Federal Reserve or jobs, are all making U.S. assets attractive and a rising U.S. dollar adds to that appeal. It seems that the market consensus believes that we are in the early stages of a secular bull market for the U.S. dollar. The midweek Federal Open Market Committee minutes confirmed that if the labor market continues to heal, then the Fed is likely to raise rates in the middle of the year even as they remain “patient” on doing so. Most analysts say higher rates are likely to happen even if there is little progress on inflation.

Despite the one-way traffic flow and after a decent start to the new year and a strong outlook for 2015, the USD is primed for some very short-term profit-taking. Today’s nonfarm payrolls (NFP) data could be the catalyst that will push investors to take some profit off the table on this one-directional and certainly most crowded of trades: being “long” USD across the majors, especially against the EUR. The lack of consolidation or any meaningful retracement by the USD thus far this year could have the dollar underperforming by day’s end no matter what this morning’s payrolls print happens to be.

Contrarian Trading is Expensive

“Buy the rumor, sell the fact” is one of the first lemming trades that dealers get to learn on trading desks. Another is to look for the market’s pain threshold, and then make it pay by staying ahead of the pack. Being a contrarian trader can be rather expensive. More often than not, one is required to have rather deep pockets to stay true to their convictions, as speculating against the natural flow is never easy. Most successes come more with the timing of the trade.

This market is definitely “bulled” up, with a higher percentage of investors leaning on another big number, not as strong as last month’s print (+321k and +5.8%), but bigger than the average monthly gains for last year (+241k). The market consensus is predicting a +250k print with a slight improvement to the unemployment rate to +5.7%. Beating consensus will obviously favor the dollar again, especially against the EUR and interest-sensitive currencies.

If the NFP Beats Consensus

Looking at the EUR International Monetary Market futures positions, the data suggests that there is room for the short positions. EUR shorts are still -15% below last year’s peak and -30% below the 2012 record. The obvious risks from Greece exiting the eurozone, and the European Central Bank meet on January 22, have been able to keep rebounds relatively weak. The lack of short-EUR positions would suggest that investors couldn’t afford to wait on a corrective future EUR bounce to speculatively sell. Being overtly bullish, the USD index is at a decade high on a Friday afternoon with no profits taken off the table and with many strategists looking for a floor, possibly because of the major rebounds from €1.18-1.20 in 2010 and 2012. It could cause a whiplash effect by day’s end.

Do not be surprised to see the USD initially find support and then experience an afternoon retreat. The biggest and perhaps only danger for dollar bulls is purchasing offside USDs that hurts the position average. Watch what central banks are doing. On the last go-around in 2010/12, they were selling USDs to diversify, but now they are buying to replenish reserves spent defending local currencies. The dollar trend remains strong, but at historic highs, it requires patience and massaging of position averages.

If the NFP Is Softer-than-Expected

Against the EUR, the dollar is up +2.2%, but a slower-than-expected December report could slow the USD’s rise temporarily. An underwhelming report, less than +200k print, could easily kick-start some aggressive profit-taking. The USD weakness will be particularly noted against interest-sensitive currencies such as JPY, EUR, and CHF, but the moves will be brief as the trend of better U.S. data and divergent monetary policy will continue to support the greenback in the coming months. There are many EUR sellers that have missed this week’s move and are hoping for a weak number to get that EUR rally to sell again.

If the NFP Number Is as Expected

A payrolls print on target (+250k) will have some dealers and investors looking to take some USD profit off the table. The dollar index could go lower, but nothing as deep as a headline miss. Expect Friday market activity to die down much quicker than under the other two scenarios.

A payrolls print on target (+250k) will have some dealers and investors looking to take some USD profit off the table. The dollar index could go lower, but nothing as deep as a headline miss. Expect Friday market activity to die down much quicker than under the other two scenarios.

Forex heatmap

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