Dollar: Will the NFPs Give Us The Taper Volatility The Fed Couldn’t?

Once again, the dollar has come unmoored from its safe haven role as substantial speculative positioning has subsided. For some, that is an unusual assertion given that the S&P 500 managed to overtake 1,700; but conviction behind the move – and thereby risk taking – is notably deficient. The drive towards or away from ‘risk’ can be revived with the proper catalyst however. Following Wednesday’s awkwardly balanced 2Q GDP (a headline beat and downward revision to the previous quarter’s figure) and the Fed’s obfuscation of their plans for the lifespan of their QE3 program, there was some interest in Thursday’s data. The ISM manufacturing report is a meaningful and timely update on an important sector of the US economy. The 55.4 reading reflected the strongest growth for the sector in two years. Such an indicator can add to the Taper argument, but it isn’t directed enough to the central bank’s targets to offset a general boost to investor confidence. That same lack of focus will not plague Friday’s employment data. There will be significant headline space dedicated to the net payrolls change for July, and the first move by the market will likely follow the outcome of this data point. However, the real influence comes from the jobless rate – the ‘threshold’ for Fed stimulus and rates. A hold or uptick could defer the Taper (USD bearish). A lower jobless rate could revive the September outlook.

Euro Eases Back Despite ECB Hold, Improvement in Manufacturing Activity
There was little drive – bullish or bearish – euro traders could draw out of this past session’s top event risk: the European Central Bank’s rate decision. Without a tangible change in rates or extracurricular monetary policy efforts, investors were left to wade through President Draghi’s remarks at the press conference that followed. What forward guidance the central banker did offer was a repeat from last month. Most decisive was his reiteration that rates will remain low for an extended period of time. On the economy, Draghi noted an improvement in confidence indicators offers some level of confirmation that the Eurozone economy was stabilizing, but risks did remain to the downside. Manufacturing data Thursday seemed to flesh that sentiment out. The final reading of the Eurozone factory activity report printed a better-than-expected 50.3 reading (a read above 50 reflects growth). That said, the periphery continues to struggle. Spain’s progress report unexpectedly tipped into contraction while Greece’s highest reading in over three years was still the 45th consecutive month of contraction.

British Pound Left to Drift after BoE Hold Refocuses Next Week’s Quarterly Report
With a greater sense of expectation that a year’s worth of previous policy meetings, sterling traders were looking for the Bank of England (BoE) to offer a little more market-moving fodder. However, the policy body would not expound on their predictable decision to maintain both the benchmark lending rate (0.50 percent) and bond purchasing program (£375 billion) at their previous levels. According to the brief statement released with the announcement, the Monetary Policy Committee’s (MPC) forecasts for growth and inflation will be released in next week’s quarterly Inflation Report. The group is also expected to address Chancellor Osborne’s request for the central bank’s assessment of whether to use thresholds and forward guidance. This could signal a meaningful shift in policy influence if the BoE acquiesces.

Japanese Yen Crosses Rise Alongside Nikkei 225 Rally
Aside from the US dollar’s exceptionally climb, the most remarkable and consistent move from the majors was the Japanese currency’s hearty drop. The yen crosses rose between 1.7 (USD/JPY) and 0.5 (NZD/JPY) percent through the close Thursday. Looking at this as a ‘simple’ carry trade build up is complicated by the universal climb in the other well-known funding currency: the US dollar. A significant correlation between the lower-yielding yen crosses (USD/JPY, EUR/JPY, CAD/JPY) and Nikkei 225 continues to build – while these pairs’ relationship to US and European equities benchmarks is virtually non-existent. This helps isolate the capital inflows and outflows for Japanese financial markets that have stepped in for a weak or altogether absent ‘risk on / risk off’ fundamental theme.

Australian Dollar Offers Questionable Bounce as Rate Cut Fears Ebb Slightly
The Australian dollar advanced against most of its counterparts with the exception of the US dollar and pound this past session. Without a steadfast risk move, there wouldn’t be much carry drive. Looking to the economic docket, there were notable releases on deck but the balance would too contradict the Aussie dollar’s rise. While the Chinese government’s manufacturing survey unexpectedly rose, the HSBC’s slid into contraction with a 47.7 reading. That is a dubious contrast for Australia’s largest trade partner. At home, Australia’s own manufacturing activity report dropped sharply to keep the sector in contractionary territory for a 25th consecutive month. So, where did the currency’s buoyancy originate? Looking at swaps, theprobability for a 25 bp rate cut next week eased slightly to 92 percent. Not much to feed a rally on…

New Zealand Dollar Yield Offers Biggest Premium to AUD in 4 Years
Despite the rise in risk based assets, the New Zealand dollar (kiwi) has put up an uneven performance recently. This is yet another piece of evidence that the appetite for yield is not so high that risk appetite is driving all areas of the financial markets – like the carry trade. However, aside from the level of investor sentiment, the kiwi has nevertheless put itself in a better position against fellow high-yield currencies. A strong sign of this improved position on the carry currency scales is the performance of AUDNZD. The pair extended its massive five-month drop to over 13 percent and nearly 1,500 pips. Looking at the return between the Aussie and New Zealand currencies, the 10-year New Zealand government bond yield is trading 55 bps over Australia’s – the biggest premium since May 2009.

Gold Extends Worst Trends in 10 Weeks but is Only Down 1.8 Percent
Through Thursday’s close, gold has slid for five consecutive trading days. That is the worst series for the precious metal in 10 weeks – following the collapse of the recovery effort that followed the momentous tumble below $1,500. Yet, despite the tally of red days; gold has only given up 1.8 percent. This is more aptly labeled a range than a meaningful bear trend. But that can change. The focus for gold bugs should remain with the US dollar which plays the commodity’s foil in measuring the want for traditional ‘fiat’ assets. As the greenback climbs alongside the United States’ benchmark equity index, both the safe haven and alternative store of wealth roles are tempered. In the upcoming session, the US labor headlines will pose a serious concern for the metal as we are on the cusp of a very media-friendly support: $1,300 (also a long-term 50 percent Fib retracement). Should the labor report offer a strong print, the curb on the Taper can send the dollar soaring and gold diving.