US Employment Data Beat Expectations

The 195,000 gain in nonfarm payrolls and strong upward revisions to prior months put the average monthly payroll gain just above 200,000 in 1H. This was the level that various Fed officials had said would show that the labor market had improved enough to begin tapering off QE. The figures therefore cemented expectations that QE tapering is likely to start in September, sending both stocks and US Treasury yields higher. However the markets ignored all the recent guidance by Fed speakers that QE and interest rate policy were separate issues and repriced the Fed rate outlook to assume that the Fed starts hiking rates by the end of 2014, well before the mid-2015 or later timeframe that Chairman Bernanke had indicated. The result was general strength in the dollar all around.

I would expect this strength to be maintained. Look at the other central banks: the ECB and Bank of England just started experimenting with “forward guidance,” a new form of extraordinary monetary policy, while the Bank of Japan is only four months into the biggest QE program yet. The Reserve Bank of Australia is likely to cut rates further. The Swiss National Bank is intervening massively to keep its currency from appreciating. Only in some of the EM countries, where inflation is starting to be a problem, might the central banks consider tightening. But as US interest rates rise, their yield advantage dissipates and they have to worry about tightening so much that they choke off growth. The dollar seems likely to continue its gains, in my view.

As usual in the second week of the month, there are not so many major indicators coming out. The Bank of Japan is the only major central bank meeting (Thursday), although ECB President Draghi will be testifying the EU Parliament today and Fed Chairman Bernanke gives a speech on Wednesday. Otherwise, the major indicators for the week will be the industrial production data (Germany today, UK on Tuesday, France and Italy on Wednesday, Japan and EU on Friday). No major US data during the week, just consumer credit (today), small business optimism tomorrow and PPI and Michigan consumer confidence on Friday. China’s bank lending figures, due out during the week, will also be significant. Today the Bank of France business sentiment may also be of interest, although not that market-moving. Already today it was announced that the German trade surplus fell to EUR 13.8bn from 18.1bn, with the current account surplus to EUR 11.2bn from EUR 17.6bn. Both were well below expectations. The good news is that Germany is importing more (+1.7% mom) and exporting less (-2.4% yoy). This can help the rebalancing of the Eurozone economy; Germany’s trade with the rest of the EU is still in surplus by around EUR 44bn a year (calculated not including today’s data), although this is down sharply from the peak of EUR 127bn only five years ago.


The Market

EUR/USD
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• EUR/USD was a major loser following the beat by the non-farm payrolls and the upward revision of the previous month’s figure. The euro in fact was, since Friday morning, the fifth biggest loser out of the 24 currencies we track versus the dollar, adding to the losses following the ECB’s forward guidance. The pair was seeing significant bearish momentum half an hour before the release of the U.S. employment report with bearish crossovers in the 1-hour, 4-hour and daily RSI and Stochastic Oscillator (5- and 14- period) charts ,with the beat furthering the already bearish momentum.

• Support came at the head-and-shoulders neckline at 1.2805. A rebound is likely to be met with strong tested and trendline resistance in the 1.2855 – 1.2860 area. A breakdown of the neckline sees some support in the 1.2750 – 1.2765 area with further support at 1.2705. Traders may want to note that 1.2680 is the 61.8% retracement level of the July 2012 – February 2013 rally, with 1.2660 being a one-year low, which was tested in November 2012.

USD/JPY
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• USD/JPY was able to rebound from its trendline support at 100.00 before the US employment figures, breaking out from the resistance initially seen at 100.40 following the release of the NFP data. 100.80 resistance was also broken in the process, acting as a support during the correction period we saw shortly after the huge market swings on the announcement of the non-farm payrolls. USD/JPY, unlike other pairs, was able to further its gains in the hours following the US employment report, with spike resistance coming at 101.50 and better tested resistance at 101.35.

• Resistance above 101.35 is currently seen in the 101.75 – 101.95 area, with resistance thereafter at 102.50. Support comes at the well-tested 100.80 level.

USD/NOK
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• The Scandinavian currencies took a beating on Friday, with the Swedish krona losing 2.3% the past 24 hours of trading, and the Norwegian krone 2.5%, being the biggest loser versus the dollar out of the 24 pairs we track.

• USD/NOK looks like it is furthering its gains from the breakout of the triangle formation it was trading in the past 5 years. Having broken out from 6.1995 resistance, the pair is currently at levels last seen 2 ½ years ago, with key resistance next seen at 6.3150 and 6.5300. Support below 6.1995 comes at 6.0090.

Gold

• Gold, together with silver, were the biggest commodity losers on Friday, with downward pressures applied on the price of gold well before the release of the NFP figure. Resistance was found a number of times during the morning at $1244 with a breakdown occurring to $1234 before a rebound to $1244 resistance materialised again. The strong NFP figures for June as well as May reinforced the view that Fed tapering is around the corner, furthering the bearish outlook for the metal. The breakdown which occurred found support at $1209, with a rebound to $1224 taking place thereafter.

• The $1200 – 1209 area concentrates significant support, with $1180 being the lowest tested level since August 2010. Resistance above $1224 is seen again at $1234.

Oil


• Oil has been a huge gainer since Friday morning with both WTI and Brent gaining 2.4%. WTI saw a rollercoaster ride on Friday, having a fake breakout from $102.00 resistance, being driven to support at $101.45 as the US equities were shedding the upward opening gap they saw an hour after the release of the NFP figures. The rebound and consequent strong gains in equities, however, supported oil triggering a breakout from $102.00 and $102.95, with resistance coming at $103.80, the 61.8% retracement level of the huge plunge in oil price following the onset of the financial crisis.

• A breakout sees further resistance at $104.50 and $105.45, with support coming in the $102.95 - $103.25 area, and support below that slightly above $102.00.

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