Dollar Rally Cools as Traders Eye U.S. Jobs Data

The pace of the greenback’s rally has been the fastest in over 40 years. For some investors, the danger is that the dollar’s move has been too rapid and could be overdone in the short term. In 11 months, the USD has appreciated +28% versus the EUR. The one directional trade — short EUR positions — has certainly dominated.

For the first time in a while, dollar trading has been contained to relatively tight ranges across Group of 10 currency pairs. The world’s reserve currency of choice is looking to tomorrow’s nonfarm payrolls (NFP) report to allow the buck to regain its former momentum and test new boundaries once more.

Weak EUR Shorts Panic

The USD is trading softer (€1.0833) as we head to the U.S. open, with a few nervous investors preferring the sidelines ahead of tomorrow’s U.S. jobs report. Trading seems to be dominated by pre-holiday book squaring and not necessarily fresh positioning.

There are fresh signs that the U.S. economy slowed significantly in the first quarter. Yesterday’s sub-200,000 reading from the ADP private-sector jobs report, coupled with the depressed Institute of Supply Management’s employment component, has prompted some concerns that a disappointing NFP report could surprise investors and lead to a deep USD selloff. The recent signs of weakness in the American economy have prompted some investors to push back their bets for the first interest rate hike in the U.S.

The Street consensus is looking at a headline gain of +242,000 versus +294,000, with the unemployment rate to remain stable at +5.5%. The six-month average job increase has lingered just shy of +300,000 each month, certainly a headline gain that’s not sustainable. A modest surprise should always be expected, but a disappointing report (close to +200,000), especially around a holiday weekend, could make things rather messy for both dealers and investors. Good Friday market liquidity will be an issue, especially with a soft jobs report.

Expect Liquidity to Be an Issue

The European session opened with a swift EUR/USD rally triggering stop-losses above the psychological €1.0800. Excluding yesterday’s soft U.S. data, some of the EUR’s rise has to be put down to the negative comments from a European Central Bank’s (ECB) executive board member, Sabine Lautenschlager, who has been questioning and casting doubts on the effectiveness of the ECB’s quantitative easing program.

Never helping the dollar is the further tightening of U.S. Treasury-to-bund yield spreads, especially the two-years dipping to their lowest point since the March Federal Open Market Committee meet. Falling U.S. yields will always be putting the dollar under pressure. Currently, 10-year notes are trading near a two-month low (+1.90%), and U.S. five-year notes have fallen below their recent lows.

With liquidity trading at a premium, expect most investors to try to stay out of trouble, especially as Europe closes ahead of the Easter holiday weekend. Some EUR price moves will be inexplicable, but until the single unit breaks through the €1.0730-€1.0930 range, the market trend remains your friend.

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