US dollar surge follows strong jobs data 8Dec14


US dollar surge follows strong jobs data

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

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The US dollar started the week with a bid that isn’t unexpected following the surprisingly strong nonfarm payrolls data. It may have even exacerbated AUDUSD selling after Chinese data proved to be disappointing. The Loonie’s performance continues to confound USDCAD bulls although the lack of any meaningful upside below 1.1420 is encouraging. This week’s lack of top-tier US data releases will leave traders foraging for direction from regional events. If so, the Reserve Bank of New Zealand meeting will be the highlight.

USDX may be warning of a pause in dollar’s rally

Look around. Major global bank economists and strategists, financial media talking heads, Central bankers and traders, and even the street corner panhandler, all agree. The US dollar is going higher. No doubt about it.

The catalyst is that improving US economic growth and falling unemployment will drive US interest rates higher sometime between May and December 2015 while the rest of the G7 deals with growth and deflation issues. Japan and the Eurozone are fighting economic stagnation and deflation. Slowing growth in China, falling commodity prices and a soft economy may force Australia to cut interest rates in February. New Zealand is actively encouraging a weaker currency through words and deeds. The Bank of Canada continues to be worried about the deflationary risks of falling oil prices. The UK’s issues are mostly political with a general election due in May.

Occasionally, everyone is right but not often and not for prolonged periods. FX moves have a history of sharply overshooting levels and then correcting just as sharply. This latest move shows some evidence of that risk, particularly due to the time of the year. The Christmas/year-end period is not known for deep liquidity. Trading books are closed for the year and holidays are taken, exposing markets to sharp swings in either direction on “one-off” flows. Why should this year be any different?

The US dollar has enjoyed a substantial rally over the past six months. The US dollar index (USDX) finally broke out of the band that had characterised trading for two years. The nearly 5% gain in the USDX since September is testing long-term weekly resistance in the 89.30-90.05 zone, which could be an early warning sign of a short-term pause and retreat, exacerbated by the combination of poor liquidity and profit-taking due to Christmas and year end.

Chart: USDX Weekly

Source: Saxo Bank

EURUSD rally meets with Santa Claus

Unfortunately or fortunately, depending upon how you look at it, the short-term EURUSD technical profile disagrees with the above USDX warning. This month, both Santa Claus and EURUSD traders with short positions are saying “Ho, Ho, Ho”. Mario Draghi left no doubt in anyone’s mind at Thursday’s European Central Bank (ECB) press conference that the ECB would take additional action to stimulate the economy in hopes of raising the inflation rate. It’s just not going to happen this week or this month but it is going to happen. Even the sceptical, Ewald Nowotny, ECB governing council member and head of the Austrian Central Bank appears to have jumped on the bandwagon according to a story in the Wall Street Journal.

EURUSD has declined substantially since September and Friday’s surprisingly strong US employment data accelerated the fall. The break of 1.2275 on Friday argues for further losses and a test of 1.2235, a level unseen since September 2012

Chart: EURUSD daily

Source: Saxo Bank

Key US data releases

The US data feast last week reverts to a famine this week.

Thursday: November Retail Sales (Forecast 0.3% ,ex-autos 0.1% month over month). Last Friday’s blow-out nonfarm payrolls report will take the sting out of any disappointment with this data while a strong report will fuel earlier than expected Fed rate hikes.

Key Canadian data releases

There isn’t any Canadian data of note that will keep the focus on the Bank of Canada.

Wednesday: Bank of Canada Financial Service Review. The governor may use this opportunity to give more insight into his views on the challenges for the Canadian economy.

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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