Fed September Tapering Still Expected After NFP Jitters

A string of solid economic data from US was originally meant to prepare markets for Fed's tapering later this month, but the expectation suffered a mild setback after the disappointing non-farm payroll report. While the NFP triggered some jitters, judging from there price actions, markets are not pricing out September tapering.The DOW attempted a recovery to 15009.84 but failed to sustain above 15000 level and closed at 14922.50. It's basically engaging in sideway consolidation and the near term outlook stays bearish. 10-year yield rose to new high at 2.984%, just shy of 3% mark. Friday's retreat was relatively shallow as TNX managed to close the week at 2.938%. Dollar index retreated after hitting 82.67 but managed to close above 55 days EMA at 82. In the currency markets, the dollar was sharply lower against commodity currencies last week, and to a lesser extent the yen. But, the retreat on Friday against euro and Swiss Franc was relatively shallow.

Markets are still expecting the Fed to scale back the $85 billion a month asset purchase at the September 17-18 meeting. Fed might cut the treasury purchase from $45 billion to $35 billion and the MBS purchase would be maintained at $40 billion. That is, effectively, Fed is lowering the $85 billion size by $10 billion to $75 billion. We'd possibly see the current near term down trend in stocks and up trend in yields continue for one more week before investors lighten their position ahead of FOMC meeting.

The Kiwi and the Aussie were the biggest winners last week as they were boosted by a strong rebound in emerging market stocks. The Canadian dollar also caught up on Friday after strong employment data. The Aussie, in particular, as seen in EUR/AUD, affirmed that it has bottomed and more upside would likely be seen. The EUR/CAD and The USD/CAD also showed sign of reversal even though the case for reversal in USD/CAD is less certain. Among the commodity currencies, AUD/NZD dipped towards the end of last week but it's basically still bounded in range and thus we don't favor neither one. AUD/CAD's corrective rise also lost some momentum after jumping to 0.9640 and making the bias in the pair neutral.

The Japanese yen was the weakest currency last week and closed lower against all major currencies. However, it should be noted that the yen had indeed staged a strong rebound on Friday which raise the chance of near term bottoming. Indeed, more downside is now in favor in USD/JPY, EUR/JPY, and GBP/JPY as theses crosses start a falling leg. But after all, the yen crosses are generally bounded in a medium term consolidation pattern and thus, we'd continue to avoid them.

Comparing the European majors, the euro was clearly the weakest one. In particular, EUR/GBP extended recent decline and breached an important support level at 0.8397. The EUR/USD also showed sign of near term reversal while the GBP/USD is still holding above 1.5422 near term support. Comparing with the dollar, we saw that the greenback is still maintaining a slight upper hand against euro and Swiss franc. Meanwhile, we believe that the upside potential in the GBP/USD should be limited as it will face strong resistance from 1.5751.

Our strategy of the EUR/USD short last week was somewhat correct as it did ended the week lower. Nonetheless, Euro's weakness was more clearly seen against others like Sterling, Aussie and Canadian. We'll tend to hold on to our the EUR/USD short this week but again will keep stops tight at 1.3250. The strategy of selling the EUR/AUD at a new high and buying the AUD/USD at a new low didn't work and Aussie rode on emerging market stocks and rebounded strongly. We'd now try to sell the EUR/CAD and the EUR/AUD on recovery this week for medium term trades. Possibly entry levels are 1.38 in the EUR/CAD and 1.46 in the EUR/AUD.