NFP Letdown Limited Dollar Gain, September Tapering In Doubt

Dollar ended an eventful week higher against most major currencies except Euro. Nonetheless, the greenback pared much gains towards the end of week after non-farm payroll letdown. Euro ended the week as the strongest currencies as limited by strong rally in crosses against Sterling, Aussie and Loonie. Yen crosses attempted to rebound on rising yield, but also lost some momentum before close. Overall, the main direction was found in selloff in commodity currencies. In particular, Aussie led other lower as expectation on another RBA rate cut rose.

Economic data from US were generally positive. Q2 GDP rose 1.7% annualized, comparing to expectation of 1.0%. The ISM manufacturing index also beat expectation by climbing to 55.4 in July. Initial jobless claims dropped 19k to 326k in the week ended July 27, the lowest level since January 2008. However, the non-farm payroll report was a disappointment. The NFP report showed 162k growth in July only, versus consensus of 185k. That's also the lowest number since March. Prior month's data was also revised down from 195k to 188k. Unemployment, though, dropped to 7.4%, lowest since December 2008.

The FOMC meeting turned out to be more dovish than expected with policymakers warned that modest growth, rising mortgage rates and persistently low inflation might affect recovery. Concerning QE tapering, the Fed intentionally separated the decision to taper from tightening and reiterated that the schedule of tapering would be dependent on upcoming economic data.

Overall, the events last week didn't raise the chance for Fed to taper the the $85 per month asset purchase in September. Instead, markets are starting to speculate that Fed would starting scaling back the stimulus in December instead. The main focus in the coming weeks would remain on incoming news that triggers adjustments in such speculation.

As markets are starting to pare back expectation of September tapering, US stocks jumped to new record high last week, with DOW closing at 15658.36 and S&P 500 closing above 1700 handle at 1709.67. 10 year yield edged to new 2013 high at 2.737 before dropping sharply to close at 2.602% after NFP. Gold once dipped to as low as 1.2824 but recovered to close above 1300 at 1312.9. Dollar index's recovery was limited at 82.494 and pared gains to close at 81.931.

Technically, an important point to note was EUR/USD's resilience despite the intra-week strength in dollar. Outlook of greenback is mixed after the week as it stays bearish against Euro and swiss, neutral against sterling, mildly bullish against yen, Aussie and Canadian. Euro was clearly the strongest one as boosted by buying in crosses, with EUR/GBP and EUR/AUD extending recent rally. The anticipated reversal in yen didn't happen and current development argues that yen crosses would climbed higher in near term.

Our strategy of long AUD/USD last week was wrong and the pair even dropped through 0.9 psychological level unexpectedly. USD/JPY and GBP/JPY was also wrong as the intra-week fall was brief and both pairs rebounded strongly towards the end of the week. Overall, we'd tend to avoid dollar and yen in near term as both would be heavily affected by FOMC speculations and movements in treasury yields. Instead, we'd focus on Euro crosses and would go long in both EUR/AUD and EUR/CAD this week.