Dollar Firm After ECB Rebound, NFP Awaited

Dollar, stocks and gold all strengthened overnight after the ECB opened the door for negative deposit rates. U.S. equities were given an additional lift by gains in tech stocks, and the S&P 500 closed at another record high of 1597.59. Gold is back above the 1475 level after breaching 1440 earlier in the week. The dollar index rebound was as high as 82.35 after dipping to 81.33 earlier this week. The unexpected fall in initial jobless claims to a five year low also helped the greenback.

Markets are expecting a 155k growth in the U.S. non-farm payroll for April. The unemployment rate is expected to be unchanged at 7.6%. It should be noted that the ADP report released earlier this week was a disappointment, showing a 119k job growth in the private sector compared to the 153k expectation figure. The employment component of ISM manufacturing also dropped sharply from 54.2 to 50.2 in April. The two figures could be viewed as a downside disappointment in the NFP. The rebound in consumer confidence provided an optimistic generating surprise: 61.9 to 68.1 for April.

Technically, the dollar is rather mixed for the moment. The pullback in the EUR/USD, while deep and sharp, didn't warrant a near term reversal so far. The GBP/USD is also holding firmly in spite of the volatility elsewhere. The AUD/USD dipped through 1.0220 near term support briefly, but there was no follow through selling. The USD/CAD also remained mildly bearish but there wasn't any decisive selling. Note that yen crosses have been generally resilient in this week's pullback, and the falls were generally shallow. We'd prefer to long yen crosses on risk rally should Friday's NFP deliver according to expectations. We prefer the GBP/JPY, based on bearishness in the EUR/GBP.

The Chinese non-manufacturing PMI dropped slightly to 54.5 in April. The Australian PPI rose to 1.6% qoq in Q1, as expected. The sterling will face another test from PMI services today. Eurozone PPI, U.S. factory orders and ISM services are also due for release.

On Thursday, the ECB cut the main refinancing rate by -25 bps to 0.5% in May, in response to the easing inflation and rising unemployment rate in the 17-nation Eurozone. Risks of further easing remain to the downside; ECB President Draghi signaled that the central bank would not avoid negative deposit rate. The special liquidity facilities are also maintained until at least the middle of 2014.

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