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The USD dollar is heading into the non-farm payrolls release with a definite bid tone, buoyed by better than expected US data releases, soft PMI data in China (ignoring the official data) and the ECB and the BoE leaving rates and the outlook as is. Following the June FOMC , many economists and strategist concluded that Quantitative Easing would begin to be pared back, starting in September. The US dollar went on a tear and 10 year yields rose due to the FOMC and Bernanke muddling their message. It took nearly three weeks for the Fed to convince global markets that "tapering did not mean tightening" and the dollar gave back most of its gains.
At the same time Bernanke went to great lengths to explain that tapering would only occur if a number of data series achieved certain thresholds. He reportedly said that tapering would begin when the unemployment rate hit 7%. which means that tomorrow’s, and future, non-farm payroll releases and the unemployment rate have achieved an elevated level of scrutiny. Bloomberg reports that the consensus forecast for tomorrows NFP is 175,000 with a forecast range of 150,000-203,000.
Source: Bureau of Labor Statistics
The strength of the US dollar over the past two days and the fact that the US has averaged 201,000 new jobs per month in 2013 suggests to me that the market has priced in a print at the high end of the range.
The risks that the US dollar is vulnerable to a Friday sell-off include:
· US dollar has already rallied suggesting that a "consensus" result will be disappointing
· Pre-weekend profit taking following US dollar rise over past two days
· Presence of significant US dollar resistance levels in a number of currency pairs, including EURUSD,(fibo 1.3255) USD CAD,(1.0360) and GBPUSD (fibo1.5290)
· An NFP well below consensus.
The View for the Loonie:
The USDCAD began a steady downtrend after peaking at 1.0602 following the June FOMC and continued to decline as the FOMC and Mr. Bernanke clarified the tapering plan until finally finding support in the key 1.0240-60 area. Despite some mixed to bullish Canadian data, including better than expected retail sales, a plethora of stronger than expected US data releases sparked renewed US dollar strength. Over the past few days, the US data releases have surprised to the upside leading to ever rising forecasts for NFP.
The following chart suggests that USDCAD gains will be hard to come by between 1.0360-80 due to multi-tops and FIBO resistance, especially if tomorrows payrolls report is merely ‘OK".
Source: Saxo Bank