Dollar: Should We Expect Volatility, Trend Development from NFPs?

The dollar found an uneasy break in its painful three-week decline Thursday. However, unless a significant switch on risk appetite trends is flipped, this is likely just a pause before the unflappable stimulus-riders return to the market. This past week was rife with opportunities for the fearful to abandon the troubled euro; and yet, most of these occasions were disregarded so that market participants could participate in a risk build up.

• Dollar: Should We Expect Volatility, Trend Development from NFPs?
• Euro Survives Spanish Bond Auction, Focus Back on Greece Deal
• Australian Dollar Will Test its Risk Response Then its Carry Position
• Canadian Dollar Traders Learn from History, Prepare for Large Jobs Deviation
• British Pound Needs Service Sector Report to Temper Austerity Concerns
• Swiss Franc: Don’t Look Away Until the SNB Acts or Defuses
• Gold Wins an 18th Advance this Year, ETF Holdings Rising, Volume Anemic

Dollar: Should We Expect Volatility, Trend Development from NFPs?

The dollar found an uneasy break in its painful three-week decline Thursday. However, unless a significant switch on risk appetite trends is flipped, this is likely just a pause before the unflappable stimulus-riders return to the market. The question, no doubt, on many traders’ minds heading into the final 24 hours of the trading week with notable resistance for EURUSD (1.3225), AUDUSD (1.0750), the Dow Jones Industrial Average (12,800) and so many others just above current spot is whether the January non-farm payrolls (NFP) report has enough influence to spark sentiment and charge the financial market’s dominant fundamental driver. If we go by the previous jobs reports’ impact, we should lower our expectations. The payrolls readings haven’t deviated far recently. And, though the jobless rate has dropped rapidly, skepticism remains. That said, the pressure for a breakout on risk-basis alone is high. A risk rally (dollar tumble) is the path of least resistance, but this trend is mature.

Euro Survives Spanish Bond Auction, Focus Back on Greece Deal

This past week was rife with opportunities for the fearful to abandon the troubled euro; and yet, most of these occasions were disregarded so that market participants could participate in a risk build up. Perhaps one of the best potential catalysts to be wasted was the series of bond auctions. Most of these efforts to raise money by Euro Zone members was via short-term maturity paper – which has exceptionally low risk of default in that short span. Spain bucked the trend with auctions of bond maturing in 2015, 2016 and 2017 (plenty of time for default risk to swell). The yields drawn were relatively low and the country raised €4.56 billion (nearly a quarter of its needs for 2012), but there was evidence of participants demanding greater yield. Nevertheless, we now turn back to a Greek bond swap deal. Is this priced in? More on that tomorrow.

Australian Dollar Will Test its Risk Response Then its Carry Position

If in doubt as to what the Australian dollar will do, refer a benchmark equities index. As the premier carry currency amongst the majors, the fundamental balance between an appetite for yield and avoidance of risk will guide the commodity currency the vast majority of the time. Our current position is no different. We have seen many of the proxies for investor sentiment (the S&P 500, Treasuries, high-yield corporate debt, the dollar, etc) meet temporary boundaries to further risk build up. In other words, there is a high probability of a market-wide risk-based breakout (be it bullish or bearish). Where the dice may land, the Aussie dollar is certain to follow. However, if we look a little further into the future; we come across the RBA rate decision and an expectation for a 25bp rate cut. Further easing will slowly shift the balance of risk/reward.

Canadian Dollar Traders Learn from History, Prepare for Large Jobs Deviation

Once again the Canadian docket has to compete with its US counterpart. As usual, the Canadian labor data is scheduled for release the same day as the spot light-stealing non-farm payrolls. If I didn’t know any better, I’d say that this is done on purpose so that their update generates a smaller market reaction as the US numbers drain speculative participation. Nevertheless, we shouldn’t write off this round of data just yet. Over recent months, we have seen a fair share of remarkable deviations between expected and actual job change figures. Expectations for the January round are riding high. The consensus is for a 23,400-position increase for the economy. In a market that carries the optimism of a market-wide risk positive bearing; a strong reading may be muted job growth is inherently priced in. Yet, a large disappointment like in October and November could contrast underlying conditions enough to unnerve the Canadian dollar.

British Pound Needs Service Sector Report to Temper Austerity Concerns

Under the ‘new normal’ for the markets, the market is concerned the bearing and strength of underlying risk appetite trends along with an asset’s relationship to this overwhelming drive. The sterling doesn’t stray far from this path, but as a low-yielding currency with a central bank pursuing government bond purchases as a stimulus measure and a strong tie to the fundamental health of the troubled euro; there are balancing factors. This strained equilibrium, in turn, leads the pound to fall back on its own fundamental health (so long as a strong wind in the sentiment backdrop or critical shift in the Euro Zone crisis doesn’t interfere). For that reason, we should pay closer attention to the upcoming service sector activity gauge for January. A positive reading could calm austerity-fallout fear and may even encourage the BoE to hold off on more stimulus next week.

Swiss Franc: Don’t Look Away Until the SNB Acts or Defuses

At the risk of sounding like a broken record (much like policy officials), I will continue to update us on the performance of EURCHF. As one of the FX market’s most notoriously manipulated currencies at the moment, we should not turn away from the Swiss franc just because its volatility has deflated significantly. Most traders will turn their attention to the most active currency pair, stock, commodity, etc; but it is the exceptionally and unnaturally quiet setup that represents the greatest threat overall. For EURCHF, the vague threat of potentially limitless intervention by the SNB should it deem the franc too high is the currency-market equivalent of a cold war on the verge of turning into a full-blown nuclear engagement. Yet, despite the pent up pressure (or perhaps because of it), we find the average daily range of the past week has shrunk to an incredible 22 pips. This is extremely quiet on a historical basis, but not unprecedented. The slowed to a weekly average as low as 16 pips back in March of 2010 – notably, just before the pair surged back to life with a 380-pip decline.

Gold Wins an 18th Advance this Year, ETF Holdings Rising, Volume Anemic

Those along for the ride, must be very impressed with the rally that gold has put up. From its late December reversal, the commodity has marched surged over $240 and 15.7 percent. Furthermore, in only 24 completed trading days for 2012, the metal has advanced 18 times – and the down days have been exceptionally small. When it comes to trading, it’s price action that matters; but venturing into the outlook, we need to develop a deeper appreciation for the fundamental convictions behind a move. We can certainly fall back on the general global economic troubles along with the European financial crisis fears for justification – then again, the S&P 500 isn’t. It is likely the case that this incredible performance is overwhelmingly due to the dollar’s tumble. If that is the case, gold is just as ‘at risk’ as a volatile position like AUDUSD.

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

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