Dollar Flat Before U.S. Jobs Report

  • USD dips before NFP
  • European PMIs fail to disappoint
  • Greece’s time is running out
  • Central banks to rundown EUR reserves further

With month-end, quarter-end, and a plethora of equity and forex option expiries now officially out of the way, investors will sit tight and wait for Friday’s U.S. nonfarm payrolls (NFP) release. Dollar bulls are looking for that specific spark that will propel the greenback to the next level. With the market looking for rate clues, many expect the U.S. employment headline to be the missing factor that’s required to push the USD beyond its contained trading ranges.

Investors Rebalance Portfolios

In 11 months, the USD has appreciated +28% versus the EUR. The record shift out of EURs was brought about after the European Central Bank (ECB) lowered interest rates on deposits. In other words, Europeans are “paying away” (negative rates) to deposit funds. Because of the U.S. yield differentials argument, investors want to purchase U.S. assets to maximize their returns. The pace of the greenback’s rally has been the fastest in over 40 years. For some, the danger is that the dollar’s move has been too rapid and could be overdone in the short-term.

Over the past few weeks, the market has witnessed a couple of massive dollar squeezes after the Federal Reserve omitted the word “patient” from its most recent monetary policy statement. Namely, the U.S. dollar’s +8% whiplash up and down move against the EUR. The U.S. consumer-price index headline conjured a +1% move in the greenback, and Friday’s headline number could be a watershed moment for the dollar. Recent soft U.S. data (retail sales and industrial production) due to colder weather could possibly take a modest bite out of the NFP report (+242,000 versus +294,000; unemployment at +5.5%). If so, investors will begin to fantasize about the Fed rate ‘normalization’ hike being further out the U.S. yield curve rather than being imminent.

Greece’s Time is Running Out

How far the EUR (€1.0742) is capable of progressing in the short term will depend entirely on Greece as time is running out for the country to solidify a new deal with its international creditors. Greece needs to agree on a reform deal to unlock the next tranche of bailout money by April 20 or literally go broke. So far, they have submitted insufficient alternatives to their lenders that contain the kind of details that would have them receive the much-needed funds. European leaders and politicians are very frustrated with Greece’s inexperienced political entourage. The longer this goes on, the greater the possibility that Russia may come to the Greeks’ rescue. This would be a relationship that most of Europe would not be pleased about.

Eurozone Manufacturing Shows Positive Signs

For now, the EUR will have to rely on positive fundamentals for support. This morning’s better-than-expected eurozone manufacturing data (Italy, France, and Germany) is another indication that the region’s economy is collectively picking up. Even the latest purchasing managers’ indexes (PMI) for central Europe (HUF and CZK) suggests that industrial production growth could reach a combined average of about +8% over the coming months as German demand for ‘regionally’ made goods increases. The combination of lower oil prices and a weaker EUR has helped European manufacturing PMIs beat expectations. However, the weakening currency has also raised import costs for manufacturers, and coupled with some European businesses continuing to cut prices, the ECB has work to do to get its inflation rate back to its target of just under +2%.

On the flipside, European producers are benefitting from a weaker EUR; it’s helping boost their market competitiveness while making competing imports more expensive domestically. ECB chief Mario Draghi is hoping that a weaker EUR will boost inflation by raising prices of imported goods, and in time, domestic business would follow suit.

Dollar Index Nears 100 Mark

The dollar index (DXY) continues to suck in broad-based demand on U.S. policy outlook. The index has just completed its ninth consecutive bull month with a 98.382 March close. This close would suggest that the index is well-positioned technically to take a peek again above the psychological 100.00 level. The massive trigger point on the topside still remains atop of 102. Through here with conviction, the USD will have strong momentum on its side. Investors are looking for that one headline to tip the scales in their favor. It could be today’s ADP private-sector payrolls report, or the Institute for Supply Management’s manufacturing index for March, but the smart money remains on Friday’s NFP release and wage growth numbers. Do not expect the EUR to stray too far from the above picture. Despite falling strongly against the ‘big’ dollar, the single currency still remains well above last month’s 12-year low of €1.0457.

Further Weakness for the EUR

Central banks are the biggest currency traders and the International Monetary Fund’s fourth-quarter 2014 global Currency Composition of Official Foreign Exchange Reserves report indicated that central banks’ share of EUR reserves dropped in the fourth quarter to +22.2% versus +22.6%. This was somewhat anticipated by the market. However, central banks in the Middle East and China are not captured by this report. They all have EURs and they have the potential to sell to rundown reserves (China is running down its reserves at the fastest pace in the country’s history). Neither China nor Middle Eastern nations want to hold low-yielding European assets.

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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