Optimism Undone By Shocking NFP, Dollar And Yields Tumbled

While Fed officials might disagree, it only took one poor non-farm payroll report to undo all the optimism over the US economy and more than reversed dollar's recent gains. Based on the solid ISM and ADP reports, markets had higher expectation of the NFP. But eventually, it showed only 74k job growth in December, less than half of consensus of 193k, and well below the most pessimistic forecast by economists. The unemployment rate did show sharp improvement from 7.0% to 6.7%. But that was primarily due to 347k contraction in labor force. This can also be reflected by participation rate dropping back to 62.8%, the lowest level since 1978. The data raised much doubt over the expectation that Fed will continue to taper the asset purchase at every FOMC meeting and end it by the end of this year.

Fed officials tried to talk down the significance of the poor NFP report. St. Louis Fed Bullard said he "would be disinclined to react to one month's number." And, "for now we're on a program where we're likely to continue to taper at subsequent meetings." Richmond Fed Lacker also said "it takes a lot more than one labor market report to be convincing that the trend has shifted and in my experience one employment report rarely has an effect by itself on monetary policy." Lacker expected "similar reduction in pace to be discussed at the upcoming meeting,"

However, traders clearly thought otherwise. The biggest movers were possibly treasury yields. 10 year yield tumbled sharply to close at 2.86%, comparing to 3.036% intraday high made on December 31. 30 year yield also dropped sharply to close at 3.796%, comparing to 3.974%, also made on December 31. Dollar index once touched 81.18 but dropped sharply to close at 80.65. Except versus Canadian dollar, the greenback depreciated against all major currencies. Stocks, nonetheless, were relatively steady with DOW and S&P 500 stayed in very tight range.

Elsewhere, the Canadian dollar was the weakest currency last week on a string of weak economic data, including the even worse employment data. Dovish comments from BoC also weighed down on the loonie. Euro initially dipped after ECB president Draghi's post meeting dovish comments but loss were limited. Both ECB and BoE left policies unchanged as widely expected. The Japanese yen was the strongest currency last week as recent consolidation continues.

Technically, the clearest trend was found in Canadian dollar, which extended its decline broadly. USD/CAD took out an important long term fibonacci level of 38.2% retracement of 1.3063 to 0.9406. EUR/CAD also took out 50% retracement of 1.7511 to 1.2126. The developments suggests that the medium term up rally in these two pairs are still having solid momentum.

European majors recovered against dollar in general and might climb further in near term. But it should be noted that we're preferring the cases that EUR/USD has topped out at 1.3892 in short term, USD/CHF has bottomed at 0.8799 in short term. GBP/USD also displayed loss of momentum in bearish divergence in daily MACD. Adding to that, EUR/JPY and GBP/JPY are looking near term bearish. Thus, we'd prefer not to long EUR/USD for the recovery and short USD/CHF for the pull back.

Regarding the Japanese yen, USD/JPY's breach of 103.90 and near term channel indicates topping and deeper pull back would likely be seen. GBP/JPY also broke near term trend line which indicates topping. We'd expect deeper fall in EUR/JPY to 141.49 and below, in GBP/JPY to 170.40 and a runaway from 103.90 in USD/JPY this week.

Finally, we'd also like to point out that AUD/USD has took out near term falling channel last week. It's still limited by 0.9004 but looks like the near term trend is reversing and turning bullish. AUD/JPY stayed in recent consolidations below 94.07 and actually Aussie had a mild upper hand over yen last week. EUR/AUD looks set to resume recent decline from 1.5596 soon and would likely head back to this support this week.

Hence, considering all the above, we'd try to short CAD/JPY and long AUD/CAD this week and believe these are the strategies with better win chance. Our strategy of USD/CHF long wasn't totally wrong as it did rise to 0.9127. But of course it wasn't right as the target was not reached. The sharp fall from 0.9127 indicated short term topping and thus, we'll close out the position first even though stop was not hit. Instead, as noted above, we'll short CAD/JPY and long AUD/CAD this week.