EUR to lose in NFP smokescreen

The move lower in the EUR yesterday was driven by various sources. Currency sales desks had five reasons to choose from while dealers pared some positions before this morning’s supposedly ‘juiced’ census supported employment report. It was like a World Cup contingent with yesterday’s headlines suggesting that Italy could ‘be the next proverbial shoe to drop’. There were rumors of a dovish Medley report. Has any one actually seen one of these? Hungary was to be the next Greece and chatter that the SNB may pull back on their EUR/CHF intervention and finally, the US oil spill is to slow economic growth. They are all valid. However, this morning’s focus is on NFP, the grandfather of economic data. The consensus range is from +500 to +750k, supported by the ‘the census worker’ (the time when the payroll survey was conducted the number was around +417k temporary workers). The direction of the dollar will depend on the percentage change of private jobs. Do not get lost in the smoke.

The US$ is weaker in the O/N trading session. Currently it is lower against 11 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Forex heatmap

US data yesterday had something for everyone. A couple of the later releases suggest that the US may have seen its peak growth rates thus far. The ISM non-manufacturing (55.4) again has recorded a flat rate for the third consecutive month and new factory orders (ex-aircraft +1.2% vs. +1.7%) fell for the first time in over year. Its worth noting that the services sector remains in expansion territory above a 50 print, however, we have not seen any uptick since Mar. Digging deeper, growth in new order remain strong, but at a slower pace (57 vs. 62). More importantly, the services sector employment reading recorded a flat reading. If one combines the manufacturing and service readings to form the composite ISM index we notice that it peaked at 56, the end to the period of accelerating growth. The ‘V’ shape recovery, technically, has also stalled according to the US factory orders (+1.2%). The previous buoyant print was aided by the gain in non-defense aircraft orders. That tends to be a volatile component that distorts many a headline. Taking out the transport component and we have a kink in the present trend. The two reports are akin to the belief that the production and inventory cycle may well be stalling out and could promote softer growth for the latter half of this year and into next. By then the US will have to overcome its own fiscal exit issue, which will certainly have an impact. Digging deeper, new orders climbed +1.2% and supported by durable goods that climbed +2.8% while non-durables dragged the headline lower. With ex-transportation new factory orders fell -0.5%. Non-defense capital goods (ex-aircraft) fell -2.6%, which is not good for a business investment recovery.

Other data showed that there was a greater than expected deceleration in US productivity growth, output per hours worked was +2.8% vs. +3.4%, m/m. The hours worked expanded by +1.1% vs. +0.7% in the 4th Q, while output growth has slowed from +7% to 4%. Compensation per hour is rising at a +1.5% annualized pace vs. a decline of -1.9%, but in real term it remains flat and a negative for sustainable earnings.

Finally, we have the employment picture. Not unusual, but boringly, the weekly US jobless claims (+453k vs. +455k) met expectations while continuing claims (+4.67m vs. +4.61m) fell slightly. It really was a non event headline, even the extended (+35.3k vs. +38.6k) and emergency claims (+21k vs. -41k) remain contained in a tight range. The ADP report came in with a different story, the headline miss (+55k vs. +70k) was backed up by the upward revisions to the two previous months (total +46k). The service sector was the biggest contributor with a strong monthly print of +78k, while goods producing sector fell -23k. On net, the report means little to today’s NFP. With the ADP only covering the private sector, the much talked about surge in Census workers is not included, that’s in today’s report (the time when the payroll survey was conducted the number was around +417k temporary workers). It’s worth remembering that over the past few months the ADP report has been rather downbeat then the official NFP headline. Today the market anticipates a very ‘big’ headline print between +550-+750k new jobs.

The USD$ is lower against the EUR +0.28%, GBP +0.21%, CHF +0.23% and higher against JPY -0.09%. The commodity currencies are stronger this morning, CAD +0.19% and AUD +0.38%. The loonie has pared some of its gains vs. its largest trading partner on the back of erratic commodity and equity prices. Global growth concerns backed by rumors of other EU periphery countries about to suffer the same fate as Greece encouraged some risk aversion trading strategies ahead of this mornings Canadian employment report. Last moths print blew all analysts away, today consensus expects a headline print of +17k new jobs and an unemployment rate remaining at +8.1%. Earlier this week the BOC raised its key overnight rate by +0.25%, making Canada the first G7 country to see a rate hike. Their actions have kept markets guessing on its next move. The tone of the statement suggests that this is not necessarily the ‘first step on a long march towards a normalization of interest rates’. This is probably the best move for Governor Carney under current market uncertainties, and signals a fairly ‘neutral bias’ that keeps the BOC’s options open going forward. The loonie had found some bids, as the market is seen using the CAD as a safer way to play an economic recovery in the US with linkage to commodities and less banking or fiscal noise to be concerned about. We are back to risk on and off again and commodity prices dominating the loonies short term direction. Let’s see what the employment reports give us this morning.

The AUD has impressively maintained its bid for a third consecutive day as stronger data out of the US again revived demand for higher yielding growth assets. Also helping the currency’s cause was their own trade data earlier this week surprisingly recording a surplus (+0.13b vs. -2.0b) with exports increasing +11%. Asian bourses chipped in providing an AUD bid after climbing to a six-month high on the back of strong US housing. Some investors are beginning to bet that the RBA will resume raising rates in the coming months after pausing earlier this week and this despite policy makers having signaled that it may keep borrowing costs steady in the coming months as it assesses the impact of the most aggressive rate hike amongst the G20 members. So far it seems that the crisis in Europe has not had a material impact on the Australian economy. Depending on equities and commodities, some investors are looking to buy AUD on pull backs, most are content to see what today NFP headline brings us (0.8460) is.

Crude is stronger in the O/N session ($75.24 up +53c). Crude prices is trying to add to their gains after the soft weekly EIA report, but it is heavy going with equities and growth concerns weighing on commodity prices. Weekly oil inventories reported a decline or -1.9m barrels vs. an anticipated -1m. Not to be outdone, total gas inventories fell by -2.6m barrels. The market had expected an increase of +750k. On the flipside, distillates stockpiles increased by only +500k barrels whereas capital markets were expecting to double the headline print. Technicals continue to believe that the market is currently overbought short term. Sellers remain on upticks as the market becomes apprehensive about today’s NFP report.

Because of gold rallying to a two week high and North American bourses in the black had speculators booking some profits yesterday’s morning session. All week the ‘yellow metal’ had been in demand as an alternative to the EUR. Rumors that other EU members were also suffering from a Greek effect stemmed the decline somewhat. The threat to global growth from Europe’s debt crisis and weaker global bourses tends to increase the demand for the commodity as a haven on pull backs. The currency concern’s is only promoting a case for owning the yellow metal. Europeans are content in using the commodity as some sort of hedge against their European holdings, believing that the EUR will just keep on going lower. GSNY has a month-end target print of 1.1700. Also lending support is India, who’s gold import numbers have been stronger than the markets been calculating (+$6.9b vs. +0.71b, y/y) and surpassing China as the world’s largest user of the commodity. For now, the market is a better buyer on deeper pull backs ($1,207).

The Nikkei closed at 9,909 down -13. The DAX index in Europe was at 6,111 up +57; the FTSE (UK) currently is 5,256 up +46. The early call for the open of key US indices is higher. The US 10-year backed up 4bp yesterday (3.36%) and is little changed in the O/N session. Treasuries happened to pare earlier losses yesterday as equity markets saw red on rumors that Hungary are experiencing‘Greek type symptoms’. The heaviness of the FI asset class can be attributed to today’s anticipated NFP release and next week’s debt auction schedule (3’s-$36b, 10’s-$21b, and 30-years-$13b). The short term bigger picture has treasury yields remaining under pressure on EU efforts to contain Europe’s debt crisis. However, do not be surprised to see dealers making room for product backed by the possibility of a stronger NFP print this morning.

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