Euro: Bumping Up Against Resistance (page 1 of 2)

DailyFX Fundamentals 01-31-08

By Kathy Lien, Chief Strategist of DailyFX.com


What Level of Non-Farm Payrolls will be Good Enough for the Dollar?

The $100 million question for tomorrow is: What Level of Non-Farm Payrolls will be Good Enough for the US Dollar? The market currently believes that 70k jobs were added to US payrolls in the month of January, but if payrolls match this forecast, how much will it really help the dollar? When looking at non-farm payrolls, what traders need to think about is what it means for US monetary policy going forward. Is job growth good enough to slow the Fed down or is it bad enough to force the Fed to deliver another big rate cut? Since the last NFP release, interest rates have been cut by 150bp. One of the main reasons is the weakness of the labor market. In December, only 18k jobs were added to US payrolls but the private sector actually lost 13k jobs. According to the leading indicators for non-farm payrolls, job growth should rebound in the month of January. However in order for there to be a meaningful rally in the US dollar, we would need to see more than 100k jobs added to US payrolls or 70k plus a strong revision to the December figure. A sharp sell-off in the dollar will be triggered by any reading less than 50k. What happens if payrolls are between 50k and 100k? Assuming that there is no major revision to the December figure, the US dollar should rally, but the rally will probably be short lived since job growth around those levels will not stop the Fed from continuing to lower interest rates (Read our full Non-farm Payrolls Preview). In addition to the labor market report, we are also expecting the final numbers for the University of Michigan consumer confidence survey, manufacturing ISM and construction spending. All of these reports are expected to be dollar negative because they represent the most vulnerable sectors of the US economy. Personal income and personal spending were released today and they were stronger than expected, but any optimism was offset by the sharp rise in jobless claims which is part of the reason why we no longer expect a blowout NFP number.

Carry Trades Rise as Traders Hesitantly Take on Risk Ahead of NFP

The stock market closed up 200 points today, which should have been the market's proper reaction to yesterday's 50bp rate cut by the Federal Reserve - but better late than never. Risk appetite is slowly returning to the markets which suggest that equity traders may be banking on a strong non-farm payrolls report. We caution against becoming overexcited about carry traders at this moment because there is still a lot of volatility across the financial markets. Also, the relationship between equities and carry trades is starting to break down and that is clearly evident today because the 200 point rally in the Dow should have triggered a more meaningful bounce in carry trades. Unfortunately, USD/JPY is only up 20 pips from yesterday's close while GBP/JPY is only up approximately 60 pips. Last night's Japanese economic data was mixed with manufacturing PMI holding steady, labor cash earnings falling short of expectations, and construction orders rebounding. As usual, Japanese data has had no major impact on the Yen crosses but comments from Bank of Japan member Nishimura last night is worth mentioning. Nishimura said that the BoJ will not rule out any policy options. Although the market has been mostly focused on a rate hike from the BoJ, his comments suggest that they may open to cutting rates if their economy slips into a recession.