As to be expected, there is much hype around this morning’s non-farm payroll release. The data, “better or for worse,” will go along way in shaping investors expectations for the December FOMC decision. To date, Bernanke and company have been vigilant on the dependency of strong data before ever considering tapering. With NFP, the granddaddy of fundamental releases, the end result will certainly have its talking points and this release in particular because of the steady stream of positioning adjustments made throughout this week. The revision in payroll expectations (+185k) coupled with not-so-dovish ECB has investors wondering specifically how to be positioned. There does not seem to be a strong consensus on what’s headline is good or bad for the dollar, thus making it more difficult to gauge the natural risk appetite of the market. Investors may want to take their next cue from both equities and the fixed income asset class.
Last September there seemed to be a “real” disconnect between how the USD reacted and its relationship with both equities and fixed income. The market was expecting the Fed to taper and seemed to “hesitate over the impact of slowing liquidity growth.” Too many, the US dollar did not want to trade like a “risk currency,” – to strengthen when both equities and US yields rallied. That divergence seems to have narrowed since then, with the USD mostly finding favor when bond yields back up and less movement when its just equities in the black or red. Despite the great lengths that US policy makers have gone to drill the possibility of paring the $85b a-month-bond buying program directly to data may not be wholly accurate. The efficacy of further asset purchases is also becoming a concern and this is not a fundamental reason. The question to a December taper must be how confident the Fed is in “tightening a looser policy” will have on the market or investor sentiment and not just domestically but internationally as well.
The dollar has somewhat underperformed this week; not helping is the month of December itself. The deeper we go into the month, both volume and liquidity become more of a premium, and varying price movements are to be expected. Wholly relying on forex price moves may not be sufficient, for a truer risk reward scenario, including equities and fixed income moves is justified. The dollar currency pairs may be in trouble if equities just rally, and could reverse that direction if US 10-year yields were only just to rally. In other words, dollar longs will be favored if the NFP headline print is only big enough to push yields higher, but not big enough to influence equities. However, it’s December and being both agile and flexible in viewpoint is very much a necessity, especially with the liquidity concerns.
Digging deeper amongst today data. Recent US “survey” data has been decent, hard data such as retail sales, industrial production, and business investment has been somewhat suspect. Under this scenario it could very much lead to a modest or a slightly lower NFP headline (+170-185k). What else to expect? The bettering of dirty data – labor force and employment should be seen as improving since their recent declines were mostly caused by the October government shutdown. Any improvement and this too should have a positive effect on both personal income and spending in October. By day’s end, investors will get to know whether its time “to taper or not” in a couple of weeks.
As we head stateside ahead of the NFP release, the main currency pairings have done very little overnight, trading in a tight contained range. This is not unusual ahead of such a major release. The 17-member single currency seems to have remained buoyed by the less than dovish Draghi performance of late, while the “patience trade,” long USD/JPY has found support from US treasury yields backing up.
Yield Divergence A Dollar Favorite
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