• Dollar and S&P 500 Charged for NFPs but is this the Indicator to Spark a Major Reversal?
  • Euro Stable through the Rumor and Rescission of a Confirmed, Second Greek Bailout
  • British Pound Ready to Stumble Further as Rate Expectations Slide to Six Month Low
  • Japanese Yen: Nation’s Financial Health will Suffer for Kan Avoiding a No Confidence Vote
  • Swiss Franc at Risk of Quick Reversal if Safe Haven Demand Flags
  • Gold Takes a Hit at the Same Time the Dollar Tumbles

Dollar and S&P 500 Charged for NFPs but is this the Indicator to Spark a Major Reversal?

We are counting down to the US session release of the May nonfarm payrolls (NFPs). The influence this indicator has in the lead up to its print and the volatility that follows is consistently potent. However, the lasting influence it has on price action has diminished significantly this past year because its fundamental significance has receded with the shift in focus to monetary policy. If we were working under normal market conditions, I would expect a quiet lead in and short-term jump in activity. Then, after the weekend, our interests would shift to the underlying theme that was guiding the broader market before the distraction came along. That said, we aren’t dealing with normal market conditions this time around. Our first concern is with the position of the markets. The greenback itself is on the verge of a significant break that can feed large scale bullish rallies on certain pairs and notable retracements on others. For the Dow Jones FXCM Dollar Index itself, the pair has worked its way into a tight range between 9,600 and 9,500. A breakout on either side could open us up to a run of at least 150 points. The potential for follow through on either side is not a common circumstance; and it is born from the positioning of different pairs. On the one hand, EURUSD and USDJPY are prone to sharp dollar losses to further retrace the currency’s hard-won gains through May. In contrast, AUDUSD, NZDUSD, USDCAD and USDCHF are on the verge of major dollar-bullish reversals, awaiting a clear signal to finally pull back from mature extremes.

The difference between these two sets of majors is the influence of risk appetite trends. This is an important consideration for how we approach the employment data. Looking at our favored benchmark for investor sentiment, the S&P 500 is sitting on the rising trendline that has carried that has defined the bullish trend for capital markets going back to September (when QE2 speculation started leverage expectations for a new, deep-pocketed buyer in the Fed). Breaking this guide for price action would be symbolic for many market participants – a change to our expectations for ‘normal.’ Six months ago, a collapse in risk appetite would have a straight-forward impact on the greenback: it would boost the currency as its safe haven appeal was boosted. Nowadays, the situation is more complicated. The initial reaction – depending on how dramatic the risk impact is – will follow similar lines as the need to unwind risky positions for liquidity or avoid uncontrollable losses will mean covering dollar shorts used to fund fundamental carry trades. But, there is another aspect to this particular driver that has changed recently. As we have discussed over the past few weeks, the greatest potential driver for the greenback going forward is a sustainable recovery in US rates (through a withdrawal of stimulus and eventual rate hikes). A major disappointment in employment could actually delay the long-awaited policy shift even further.

Our attention should certainly be on the NFPs through the final 24 hours of the trading week; but it is important to also keep a bigger perspective view of the fundamentals for the US dollar. The employment report is important only so far as it rouses irrational, short-term risk appetite trends and alters the monetary policy outlook. Yet, true capital flows are directly dependent on the stimulus efforts of the US central bank. If the payrolls don’t materially alter the most likely path for the Fed letting QE2 expiry and slowly start to work its balance sheet down later this year; the impact will not last long beyond the weekend. If there is a material shift, we have a whole different ballgame.

Related:Discuss the Dollar in the DailyFX Forum, Watch the NFPs impact on the Dollar and Markets Live with David Rodriguez!

Euro Stable through the Rumor and Rescission of a Confirmed, Second Greek Bailout

The Financial health of the entire Euro Zone is a concern that is in constant flux nowadays. However, instead of seeing expectations change from one part of the week to another; we actually witnessed an intraday shift in expectations for how this issue will settle out. Through the morning, the a Reuters article leveraged the recent recovery in the shared currency with a report that supposedly quoted officials suggesting the EU had come to an agreement on a new three-year Greece ‘adjustment’ plan (in other words, a supplementary bailout). The fact that the European authority officially denied this report didn’t seem to hurt the euro too much though as the market seems to be confident enough in an ultimate resolution that can keep the focus on the euro’s competitive rates. Also interesting was ECB Trichet’s suggestion that the Euro-area should have a common Finance Ministry. That would be a clear fix to the region’s glaring problems; but member governments would not be very friendly to the idea that other country’s could decide their spending habits. In the end, US stimulus is still the euro’s greatest volatility threat.

British Pound Ready to Stumble Further as Rate Expectations Slide to Six Month Low

For event risk the sterling found the construction PMI figure to react to (the May figure was a stronger-than-expected 54.0 reading) and tomorrow’s session brings the service-sector reading; but these are not primary drivers for the currency. The fact that the 12-month rate forecast for the BoE is at its lowest level since the beginning of December (30 bps) leverages the yield potential for their still ‘richly-priced’ currency.

Japanese Yen: Nation’s Financial Health will Suffer for Kan Avoiding a No Confidence Vote

It may seem that Japan has dodged a bullet with Prime Minister Naoto Kan as the country can push forward with its policies to stabilize growth and finances. In reality, Kan’s plan to remain in power until after the bulk of the earthquake recovery is complete leaves the government in a ‘lame duck’ situation where badly-needed reform to the fiscal situation and economic support will be even more difficult to pass.

Swiss Franc at Risk of Quick Reversal if Safe Haven Demand Flags

Heading into a high-level volatility situation, it is important to identify those currencies that are at a particular extreme as they have the greatest trading potential. The franc is one of those currencies. Having been driven to record highs against the US dollar through anti-euro and risk aversion sentiment; we are left with NFP scenarios (risk aversion unwinding dollar carry or a positive-dollar outcome) that would hurt the franc.

Gold Takes a Hit at the Same Time the Dollar Tumbles

The stumble in gold through Thursday’s session is not as remarkable as the fact that the commodity dropped back while the US dollar was similarly falling. Certainly the currency’s weakness helped the metal recover some lost ground; but it seems the appetite for some level of yield (gold does not offer a substantive yield) was routing liquidity away from the alternative store of wealth, back into fiat currencies.

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**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

Next 24 Hours

GMT

Currency

Release

Survey

Previous

Comments

1:00

CNY

China Non-manufacturing PMI (MAY)

62.5

Services might follow manufacturing lower as PBoC tightening continues

2:30

CNY

China HSBC Services PMI (MAY)

51.6

7:45

EUR

Italian Purchasing Manager Index Services (MAY F)

51.8

52.2

Peripheral services may lead Eurozone lower, though dominant services industry treading water on higher consumption

7:50

EUR

French PMI Services (MAY F)

62.8

62.8

7:55

EUR

German PMI Services (MAY F)

54.9

54.9

8:00

EUR

Euro-Zone PMI Composite (MAY F)

55.4

55.4

Overall PMI services expected flat as higher consumption leading

8:00

EUR

Euro-Zone PMI Services (MAY F)

55.4

55.4

8:30

GBP

Purchasing Manager Index Services (MAY)

54.2

54.3

Expected to fall slightly on slow growth

8:30

GBP

Official Reserves (Changes) (MAY)

$1663M

Seeing overall expansion since 2006

12:30

USD

Change in Non-farm Payrolls (MAY)

165K

244K

Most important data of the day – NFPs may follow previous labor surveys much lower, be leading economic sentiment into summer months

12:30

USD

Change in Private Payrolls (MAY)

173K

268K

12:30

USD

Change in Manufacturing Payrolls (MAY)

10K

29K

12:30

USD

Unemployment Rate (MAY)

8.9%

9.0%

Services sector improve

12:30

USD

Average Hourly Earnings (YoY) (MAY)

1.9%

1.9%

Month-to-month earnings slightly improve, though YoY stagnation points to persisting problems

12:30

USD

Average Hourly Earnings (MoM) (MAY)

0.2%

0.1%

12:30

USD

Average Weekly Hours (MAY)

34.3

34.3

14:00

USD

ISM Non-Manufacturing Composite (MAY)

54

52.8

Services may buck industry recovery

SUPPORT AND RESISTANCE LEVELS

CLASSIC SUPPORT AND RESISTANCE – 18:00 GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist 2

1.5160

1.6750

89.00

0.9345

1.0275

1.1800

0.8400

117.60

146.05

Resist 1

1.5000

1.6600

86.00

0.8900

1.0000

1.1000

0.8215

117.24

140.00

Spot

1.4478

1.6359

80.87

0.8425

0.9759

1.0672

0.8167

117.08

132.29

Support 1

1.4000

1.6160

80.00

0.8400

0.9500

1.0400

0.7745

113.80

125.00

Support 2

1.3700

1.5750

75.00

0.8300

0.9055

1.0200

0.6850

105.50

119.00

CLASSIC SUPPORT AND RESISTANCE –EMERGING MARKETS 18:00 GMTSCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

13.8500

1.6575

7.4025

7.8165

1.3650

Resist 2

7.5800

5.6625

6.1150

Resist 1

12.5000

1.6300

7.3500

7.8075

1.3250

Resist 1

6.5175

5.3100

5.7075

Spot

11.6404

1.5823

6.7230

7.7761

1.2334

Spot

6.2005

5.1495

5.3728

Support 1

11.5200

1.5040

6.5575

7.7490

1.2145

Support 1

6.0800

5.1050

5.3040

Support 2

11.4400

1.4725

6.4295

7.7450

1.2000

Support 2

5.8085

4.9115

4.9410

INTRA-DAY PIVOT POINTS 18:00 GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist 2

1.4639

1.6473

81.68

0.8478

0.9834

1.0753

0.8224

118.30

133.38

Resist 1

1.4559

1.6416

81.28

0.8451

0.9796

1.0712

0.8196

117.69

132.84

Pivot

1.4433

1.6361

80.92

0.8427

0.9773

1.0650

0.8152

116.73

132.32

Support 1

1.4353

1.6304

80.52

0.8400

0.9735

1.0609

0.8124

116.12

131.77

Support 2

1.4227

1.6249

80.16

0.8376

0.9712

1.0547

0.8080

115.16

131.25

INTRA-DAY PROBABILITY BANDS 18:00 GMT

Currency

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

GBP/JPY

Resist. 3

1.4665

1.6518

81.77

0.8533

0.9851

1.0818

0.8282

118.86

134.00

Resist. 2

1.4618

1.6479

81.54

0.8506

0.9828

1.0781

0.8253

118.41

133.58

Resist. 1

1.4571

1.6439

81.32

0.8479

0.9805

1.0745

0.8224

117.97

133.15

Spot

1.4478

1.6359

80.87

0.8425

0.9759

1.0672

0.8167

117.08

132.29

Support 1

1.4385

1.6279

80.42

0.8371

0.9713

1.0599

0.8110

116.19

131.44

Support 2

1.4338

1.6239

80.20

0.8344

0.9690

1.0563

0.8081

115.75

131.01

Support 3

1.4291

1.6200

79.97

0.8317

0.9667

1.0526

0.8052

115.30

130.58

v

Written by: John Kicklighter, Senior Currency Strategist for DailyFX.com

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