- Dollar Itching for a Surge to Fresh 18 Month Highs on NFP Release
- Euro Headlines are New but Content Stale
- British Collapses on Itself as Gilt Yields Plunge, Euro Infection Builds
- Swiss Franc Split between Strong GDP, SNB Option of Negative Rates
- Japanese Yen Keeps Momentum Moving as Carry Unwind Continues Outside Risk
- Australian Dollar Rebound Put off as Risk and Yield Outlook Drop, China Reports Pain
- Gold Consolidation: Relief for Bulls, Enticing for Bears
Dollar Itching for a Surge to Fresh 18 Month Highs on NFP Release
Normally, I play down the market impact of the US nonfarm payrolls (NFP) data because the underlying trend in the US labor markets â€" and higher up the pace of growth and monetary policy â€" are well engrained. Well, this time around, the situation is a little less stable than usual. When the masses are on edge, there is a far greater sensitivity to volatility-worth events. To appreciate what kind of condition the markets are in heading into the event risk, we need only look at the state of the majors, other risk-sensitive asset benchmarks and volatility measures.
It is a basic principle of markets that event risk has a greater impact on price action when underlying volatility is elevated and when a bearish-leaning market is met with a disappointing outcome. Both of these underlying conditions define the market we will have to deal with heading into this week’s most bombastic event risk. For activity level, we find the currency market volatility index (CVIX) hovering just off five-month highs (at 11.7 percent) while the more traditional equities market version (the VIX) edged above 25 percent this past session to probe new highs for the year. For historical perspective, both measures of fear have plenty of room to climb. There is ample evidence of the market’s bearish proclivities beyond the volatility m easures. Perhaps the best measures are the positioning of benchmark US equity indexes and the US dollar. Propped by Fed stimulus hopes, the SP 500 is dangerously close to reviving the bear trend that delivered the market its worst monthly drop since September. On the opposite end of the spectrum, the Dow Jones FXCM Dollar Index â€" an absolute liquidity provider â€" tagged 18-month highs.
All of the potential energy in the air is exciting, but that critical spark to ignite serious trading is the fundamental catalyst itself. The consensus forecast for the data heading into the event is for a 150,000-net addition to payrolls that would pick up the pace from April’s 115,000-reading. This forecast is further very close to the average 151,000 new highs over the previous 12 months and doesn’t fall to far from the ADP’s own employment report (a reading of questionable use, but a contributor to speculation nonetheless). For all intents and purposes, we have a neutral to slightly bullish bias heading into the event. That is a perfect situation for a substantial disappointment. Considering fear levels are high, it doesn’t take much to revive an existing deleveraging trend. For the dollar’s part, a disappointment in the labor data would be the best outcome for furthering its climb as the preferred safe haven. Alternatively, an in-line read w ill be quickly discounted and a beat will fight the current.
Euro Headlines are New but Content Stale
The Euro-area’s fundamental health has not improved, but neither has his materially deteriorated this past 24 hours. And, considering how far this shared currency has fallen over the months; an active push becomes all the more important. For fundamental fodder this past session, the headlines were once again concerned with developments for Spain. While the IBEX dropped to fresh lows and credit default swap premiums topped a record, the height of news for the country’s financial situation was the discussion between Spanish leaders and the IMF â€" which led to speculation that a bailout was being worked up, a rumor that that was promptly squashed. Otherwise, the market is weighing the tenacity of Germany in its anti-Euro bond stance and the possibility of the ECB cutting rates to help growth after inflation dropped to a 15-month low.
British Collapses on Itself as Gilt Yields Plunge, Euro Infection Builds
There were two pieces of scheduled event risk in the previous 24 hours that fundamental traders could try to connect to the sterling’s impressive, bearish performance Thursday. Neither would was actually driving the market. The pound’s painful 1.8 percent tumble this past three days was extended (outpacing all of its major counterparts) on a two-fold selling effort: the continued deleveraging of over-ambitious hawkish positioning and the growing threat that the Euro Zone crisis will spill over its borders. UK CDS are at 3-month highs and gilt rates are at record lows.
Swiss Franc Split between Strong GDP, SNB Option of Negative Rates
There were contrasting signals for the Swiss franc. On the positive side, we had a better-than-expected showing from Swiss GDP â€" unexpectedly growing 0.7 percent against forecasts of stagnation in the first quarter. A positive for the franc is a negative for the SNB - though looking at the exports component, a 0.4 percent contraction suggests the exchange rate supports their pressure. However, keeping the pressure on the franc and buoyancy for EURCHF was the suggestion by SNB member Danthine that negative rates to 50bps is a policy option.
Japanese Yen Keeps Momentum Moving as Carry Unwind Continues Outside Risk
Risk appetite trends were bouncing back and forth through Thursday’s session, but the Japanese yen was barreling forward with reckless abandon. Riding high on momentum, the safe haven currency posted hearty gains against all of its most liquid counterparts. Where is the disconnect between the Japanese currency and say stocks? Equities are more likely to pull up from losses without an active driver because of the latent promise of stimulus from central banks. In the FX market, there is little reason to rebuild carry positions as yields continue to drop.
Australian Dollar Rebound Put off as Risk and Yield Outlook Drop, China Reports Pain
The Australian dollar simply can’t catch a break. Risk aversion kicked back in early morning Friday with the US dollar testing 8-month highs against its high-yield counterpart. As for that ‘high-yield’ moniker, the market is now fully pricing a 25bp cut next week and sees a 50 percent chance of a 50bp cut. Looking further out a full 150 bps worth of cuts is priced into swaps over the coming 12 months. To add a little freshness to the currency’s pain, the China connection was revived when the country’s manufacturing activity report significantly missed consensus.
Gold Consolidation: Relief for Bulls, Enticing for Bears
Given all the volatility recently as well as the dollar’s progress against its major currency counterparts, gold bulls are probably relieved that the precious metal is consolidating well-enough above sixâ€"month lows. We shouldn’t grow too optimistic just yet however. We have to remember that the commodity is crawling just above a major bearish break when risk aversion is in high gear. This directly contrasts its theoretical fundamental value as a safe haven. If the dollar continues to draw interest, it is a sign of liquidity demand â€" a move gold can’t compete with.
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--- Written by: John Kicklighter, Senior Currency Strategist for DailyFX.com
To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter
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