Dollar Well Positioned Should NFPs Spark Risk Aversion

Dollar Well Positioned Should NFPs Spark Risk Aversion
The dollar was offered a taste this past session of what could be if the upcoming NFPs go its way. A measure of schadenfreude was enjoyed by the greenback at the expense of a euro that saw its monetary policy backdrop offer up a sudden change of tack. Yet, the real drive would come through the shift in speculative equilibrium through the morning hours of New York trade. The blow to optimism was no doubt in part due to the interpretation of the 3Q US GDP release. On its surface, the 2.8 percent annualized performancewas an unexpected acceleration and encouraging sign for world’s largest economy. Of course, the market is looking more critically at important data nowadays; and this update adds weight to speculation that the FOMC Taper can come in December or January rather than the recently projected March meet.

The growth data is disadvantaged as an immediate monetary policy benchmark as it is dated and obscures the Fed’s specific targets (employment being the explicit one). That said, it is valuable as a gauge as to how susceptible the market is to meaningful change in those updates that hit closer to the stimulus-mark. The October NFPs are as close to dead center as we will get. Yesterday’s volatility swell suggests there is a bias towards responding to data that builds the case for an earlier central bank move to curb its stimulus efforts. This will be especially true of this round of data as it is expected to reflect the US government shutdown and comes after the October FOMC statement refused to soften its tone on a need for an eventual weaning. A payrolls miss and uptick in unemployment would be seen as a QE3-for-longer support, but the positive response to such an outcome will likely be curtailed. The real explosion would be a ‘good’ reading razing risk trends.


euro Throttled by ECB Rate Cut, More Easing and Losses Likely
The ECB (european Central Bank) caught most in the market off guard when it announced a cut to the benchmark interest rate to 0.25 percent. Many of those with a dovish forecast had expected the move to come later and the central bank to bypass the key rate as cuts so close to zero have yielded little benefit to other developed countries that have trekked a similar path. This was likely a ‘shock and awe’ move to precede a more broadly accommodative stance moving forward. The group also made it clear that they would offer as much liquidity to banks as needed over the next year-and-a-half. This warning without action is reminiscent of the OMT program which has yet to be used. Though, with the ECB balance sheet shrinking, short-term interest rates rising and EZ countries poorly positioned for a global swoon in economic activity; a fresh stimulus move is likely within the next two quarters. This can materially alter the euro’s general bias moving forward.

Yen Crosses Shaken as Volatility Highlights ‘Expensive’ Carry
There was little ‘direct’ fundamental event risk to influence the Japanese yen Thursday, but that didn’t stop the currency from leveraging the biggest rally on the day. This is generally a ‘safe haven’ move in response to building US stimulus concerns, but that term is somewhat misleading. Rather than seeing capital flee to Japanese markets – JGBs, money markets, etc – we are seeing an unwinding of expensive and low-yielding carry trades that were funded through the yen. Deleveraging can be more kinetic than simply seeking out safe haven.

Australian Dollar Worst Performer on Risk Off Day
This Aussie dollar has gained a minor foothold after the release of the Chinese trade figures. According to the Statistics Bureau, Australia’s largest trade partner experienced a $31.1 billion trade surplus last month. For Australia, the slightly better 7.6 percent increase in imports growth is more directly encouraging; but a general improvement in the country’s economic health bodes well for its primary supplier for key natural resources. Yet, the pickup the carry currency is experiencing falls far short of offsetting the losses suffered through Thursday’s session. A tremor in global investor sentiment is easily amplified by the Aussie dollar’s fundamental position. On pairs like AUD/JPY (down 1.4 percent), the exchange rate is richly priced given the actual carry – something echoed by the RBA monetary policy statement this morning.

British Pound Surprisingly Strong with Mum BoE
When the market is on edge and prone to selling off on any and all ‘bad news’, quiet can be a blessing. It certainly was for the sterling this past session. The British pound advanced against all but the Japanese yen Thursday – quite the feat given the level of volatility and sensitivity to ‘risk’ trends. For the sterling, the BoE’s (Bank of England) decision to hold steadyon both its benchmark rate (0.50 percent) and bond buying program (£375 billion) has an indirectly bullish impression. With a contrast to the euro, which has seen the baseline for its region’s returns drop, european capital is diverted towards the UK. For comparison, the UK 10 year government bond yield is 2.67 percent compared to Germany’s 1.68 and France’s 2.15. Coming up, we have the September trade statistics and the pound has a hunger for positive growth data.

Canadian Dollar: Don’t Forget Canada has Jobs Figures on Deck as Well
Given the abundance of analysis and media coverage dedicated to the US employment report coming up – particularly when the market is carrying its Taper fears on its sleeve – it can be easy to forget that there is a Canadian jobs release due Friday morning. Over the past 12 months, the net payrolls report for Canada has seen an average absolute surprise (excluding ‘better’ or ‘worse’, simply the deviation) of 32,000 jobs. That gives us plenty of room for an unexpected outcome against the 11,000-consesus forecast. That said, those trading USD/CAD shouldn’t expect a particularly direct response to this data unless it conforms to the implied response to the US data. However, for pairs like AUD/CAD, NZD/CAD, GBP/CAD and others further away from the risk extremes; this data can carry far greater influence.

Gold Slips to Three-Week Low, Mixed Stimulus View
From a technical standpoint, gold closed Thursday down 0.8 percent – the seventh decline in eight trading days. However, the slip to three-week lows was relatively restrained. And, that is likely on account of the mixed fundamental backdrop that the alternative asset’s traders read in the session’s headlines. On the one hand, the positive 3Q GDP reading from the US has encouraged enough confidence in a timelier FOMC Taper to bump the dollar higher and weigh the S&P 500. On the other hand, there is no interpretation needed of the ECB’s dovish shift. A rate cut is a high up on the stimulus scale – only short of LSAP (large scale asset purchase program). More accommodation from the european authorities however would do little to offset the influence of refreshed Taper fears though. Gold bugs should watch the US jobs data closely.