Strong NFP sinks USD 4Mar16


Strong NFP sinks USD

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

  • NFP job gains beat forecasts
  • Additional good data for Canada
  • ECB in the driver’s seat for EURUSD

US job gains announced today were stellar. Photo: iStock

By Michael O’Neill

It has been one of those days. The headline nonfarm payrolls (NFP) number soundly beats the consensus forecast and the USD sinks. Suddenly, average hourly earnings is a more important number than new jobs. The EURUSD reaction suggests that the market was short going into the number and today’s move may just be a stop-loss infused short squeeze ahead of the weekend.

Puzzling payrolls performance

US nonfarm payrolls smashed consensus forecasts and printed a gain of 242,000 jobs (forecast 190,000). EURUSD plunged (as expected) and then soared (unexpected)

Part of the answer is that average hourly earnings declined and came in at minus 0.1% vs. expectations of a 0.2% rise. This data muddies the waters as to the need for higher US interest rates in the near term.

However, that may be just a case of traders over-thinking ahead of the weekend. There is no denying that the NFP report was strong and even last month’s report was revised 23,000 higher.

The EURUSD downtrend is under duress. Since peaking at 1.1375 on February 11, EURUSD has been in a steady downtrend which has been tested often but never broken. That changed this morning with the EURUSD short squeeze. A break of the 200 day moving average at 1.1045 could lead back to the January peak.

Rate cuts shall boost, not hurt the economy. Photo: iStock

Enter the Draghi

Which Mario Draghi will show-up at the European Central Bank (ECB) press conference on Thursday? Will it be “Super Mario”, he who will do “whatever it takes” or will it be “Neutered Mario” tamed by the Bundesbank.

An MNI story purportedly claims that ECB members have no policy consensus beyond a 0.10 deposit rate cut which led to EURUSD buying in Europe. Why is that news? What’s the point of having a policy meeting if everything is agreed upon beforehand?

On January 21, Mario Draghi expressed concern that the annual inflation rate for 2016 would be significantly below forecasts largely due to low oil prices. Since then, WTI has rallied 15.3% but the price remains below the long term downtrend line ($35.90/b) which has capped gains since October 2014.

Last Friday, Eurozone inflation was reported to have dropped 0.2%, most of which was due to the oil price decline. The minutes of the January ECB meeting hinted that there was wide support from the board to get ahead of the inflation threat, according to the Financial Times.

The recent US data has surprised to the upside including this morning’s nonfarm payrolls report which posted a 242,000 gain vs. consensus forecast for a gain of 190,000. However, the average hourly earnings (AHE) component was the star of the show. AHE were weak which has diminished the near term prospect of higher US rates while handing near term EURUSD direction to the ECB.

Mario Draghi may not be armed with a bazooka at next week’s meeting but he probably doesn’t need one, since traders appear to have discounted his effectiveness and that may be a mistake.

Finally found: Mario Draghi’s famous Bazooka. Photo: iStock

Exports boost Loonie

The short term outlook for the CAD took another turn for the better with this morning release of the Merchandise Trade data. Of note was the 3.6% jump in exports, a key metric that the Bank of Canada monitors to help measure economic growth potential. That data combined with the USD decline vs the majors, has USDCAD probing support in the 1.3370-90 zone.

The Loonie has benefitted from a series of positive data surprises including a big jump in headline GDP. That news plus promised fiscal stimulus by the Federal government and stable to firm oil prices will weigh on USDCAD, at least for the next week.

USDCAD 30 minute

Source: Saxo Bank

The week ahead

It’s going to be a good week, although “good" is a relative term depending upon how you are positioned in EURUSD. Thursday’s European Central Bank meeting headlines closes the central bank show with the Bank of Canada and the Reserve Bank of New Zealand being warm-up acts on Wednesday. Preceding the ECB will be key Chinese trade and Inflation data as well as the Eurozone GDP report. There isn’t much in the way of key US data which may limit USD moves.

The week that was

This week lacked the drama and price volatility seen in previous weeks. Monday was noisy with moves lacking conviction. The only thing of note to come out of the G20 meeting was a large carbon footprint, created by leaders and their entourages. Even China’s 0.50 bp. cut in the RRR didn’t create much of a stir in FX markets.

EURUSD lost ground on worse than expected CPI data but ended the New York session pretty flat on the day. Weak US pending home sales and Chicago PMI data was ignored. NZDUSD was the biggest loser by the close of the New York session.

When the first day of March arrived on Tuesday, traders donned their rose-coloured spectacles helped by an improvement in ISM Manufacturing data and higher equity markets. The Reserve Bank of Australia left rates unchanged and sounded rather optimistic which gave AUDUSD a boost.

Kiwi got a lift from a jump in the prices at the GlobalDairyTrade auction while the Loonie took flight on strong headline GDP and higher oil prices. USDJPY was unable to crack resistance at 114.20 and EURUSD stayed within a narrow band.

Wednesday, AUDUSD rallied again, this time on strong GDP data. The Nikkei soared 4.1% boosting USDJPY but 114.56 capped gains in New York. The ADP employment report beat forecasts and the EIA Crude Stocks change report showed a gain of 10.37 million barrels. Both pieces of data had little, lasting impact. EURUSD traders turned a deaf ear to ECB officials and EURUSD closed flat on the day in New York.

Thursday, the USD was mostly mixed in fairly narrow ranges during the Asia and European sessions. AUDUSD had another good day thanks to an improvement in the trade data. GBPUSD ignored weak data and rallied as some of the Brexit panic positions were unwound.

New York traders used news of a soft-ish ISM non-manufacturing index to sell dollars and by the time of the handoff to Asia, the US Dollar was down across the board, with only the JPY ceding a bit of ground.

Friday, the stellar job gains announced in the NFP headline was tarnished by a decline in average hourly earnings resulting in a hefty US dollar short squeeze.

Traders donned their rose-coloured spectacles. Photo: iStock

— Edited by Clemens Bomsdorf

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Author: Loonieviews

In the past 30+ years, I have been an FX interbank market making trader, a high performing FX and Derivatives Sales person, creator of simple and complex risk mitigation strategies and a manager of high performance FX teams. The Trade of the Day is a culmination of that experience. Retail FX traders have access to a well-crafted and carefully researched FX trade strategy designed to generate FX profits while mitigating losses.

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