Markets prepare for a potentially crucial Non-farm Payrolls

Market Overview

It is Non-farm Payrolls day and this potentially crucial report can only add to the volatility in the markets. The sharp gains on equity markets in Europe that had been exacerbated by a dovish outlook from ECB President Mario Draghi are being unwound. The positivity did not percolate through to Wall Street which closed broadly flat (S&P 500 up 0.1%) and Asian markets have given back some gains overnight. All of which has left European markets trading weaker at the open. Normally on Payrolls day you will find markets settling in front of the report, but being the final important announcement prior to the September FOMC meeting, traders will be on edge as this report could tip the balance over whether the Fed will raise rates or not. The dollar has strengthened again, but interestingly there has also been an element of safe haven moves, with the yen strengthening and US Treasury yields falling away.

The feeling amongst the market is that a strong Payrolls report could induce a rate hike. What would be a strong report? Well that’s a great question, as focus does not seem to be on the headline payrolls data (expected to e 220,000), more looking at the impact of the strength of the labor market on wage pressures and for pent up inflation. It is my feeling that it would need to be a smash the lights out number (say north of 300,000) for the Fed to brush aside the recent market turmoil and the lack of inflation. Furthermore there would need to be signs of wage growth which for now remains steadfastly anchored around 2%.

In the forex markets, there are some perhaps uncharacteristically strong moves underway. The yen has strengthened overnight and is over 0.5% stronger against the dollar. The euro has found some near term support, but the commodity currencies are back under bit of pressure today as all the Aussie, Kiwi and Canadian loonie are weaker. Perhaps this is once more linked to the oil price which is around a percent lower in early trading, whilst gold and silver are broadly flat.

Traders will be training their focus on the Employment Situation report out of the US at 1330BST. Along with the headline Non-farm Payrolls expectation of 220,000 jobs added in August, the market also expects unemployment to rop to 5.2% (from 5.3%), average wages to grow by 0.2% for the month and the number of average hours worked per week to dip slightly to 34.5 (from 34.6). Last month’s labor force participation rate was 62.6%.

Chart of the Day – NZD/USD

We are getting a few conflicting signals on the Kiwi dollar of late. The breakdown of the trading band below $0.6500 arguably has already hit its downside target of $0.6260, and as the “trend is your friend” an outlook of selling into rallies remains viable. The key overhead resistance band $0.6465/$0.6500 looks to be a decent area to continue this strategy. However, there is a nagging doubt in my mind now (aside from the fact that the Kiwi tends to react positively to a rising oil price). The technical momentum indicators are showing a series of positive divergences and although these are not as prominent as the bearish divergences on USD/CAD is could be another sign that the dollar bulls are not as strong against the commodity currencies as it was previously. On NZD/USD the positive divergence is most obvious on the RSI which has turned higher well above the lows of July. If the Stochastics and MACD lines also continue to improve, then there is a real prospect that downside momentum is seriously waning. The resistance band $0.6465/$0.6500 will become key in this scenario as until this is broken then there is nothing that has really been achieved. The support is at $0.6310 which has been tested throughout the past few days and so far remains intact.

EUR/USD

A dovish ECB press conference statement from Mario Draghi resulted in a sharp slide of over 100 pips again in the euro as the ECB cut back its forecasts for growth and inflation whilst also leaving the option open for extending its QE program. The impact on the chart has been very interesting with a move back to the key medium term pivot band of $1.1050/$1.1100 where support has started to form again. The momentum indicators have taken a turn for the worse though and I think that this time around the pivot band will have a good going over. The Stochastics have “bear kissed” to turn lower, whilst the RSI is also turning more bearish and the MACD lines are falling away having also crossed lower. The hourly chart also reflects the increased downside pressure now and there is now a key resistance from the old range floor at $1.1155 to contend with. The hourly momentum indicators are also negatively configured. Add in the volatility of the Non-farm Payrolls report today and it could be a tough day for the key pivot band. The initial support of yesterday’s low is in place at $1.1086.

GBP/USD

Cable is now drifting into a ninth consecutive negative day and the potential for this range play that I have talked about previously taking hold is running out of space. For me the medium term trading range that I (still) believe that sterling is trading in will turn bearish on a break of the key June low at $1.5170. The RSI is no below 30 and this would suggest it is now or never for the sterling bulls to return. The hourly chart shows the consistent bearish pressure to the downside, with a sequence of lower highs and lower lows. The latest reaction high comes in at $1.5325. The hourly momentum indicators also reflect the negativity surrounding Cable of late. With the hourly RSI consistently falling over around the mid-50s and the MACD lines bearishly configured. Yesterday’s low at $1.5217 is the initial support but that illusive buy signal I have been waiting for is just not happening. Perhaps a weak Non-farm Payrolls number will do the trick?

USD/JPY

The outlook for Dollar/Yen remains decidedly uncertain with the market performing in a very choppy manner in recent days. Once more again though the bears have taken control in the Asian session with the yen strengthening. A breach of the reaction low at 119.20 from Wednesday’s low whilst not emphatic, reflects that demand for the safe haven yen is still strong. The momentum indicators remain negatively configured with the RSI failing to recover above 50 before falling away, the MACD lines in decline and the Stochastics also falling. The hourly chart shows the deterioration in the past 24 hours which is reflected in consistent decline in the price and deterioration in hourly momentum. Initial resistance for a rally today comes in a band between 119.60 and 120.20. The key reaction high that the dollar bulls need to take out now to change the outlook is at 120.70.

Gold

With a second strongly negative candle in a row, the outlook for gold deteriorated yesterday and there is an increasing potential that the bears will be pushing the price lower once more. The momentum indicators are leading the way lower too. Note the head and shoulders pattern on the RSI which is now moving to a 3 week low, and the Stochastics which are falling away having completed a “bear kiss”. If the MACD lines start to fall away too then the alarm bells will be ringing. This all suggests pressure on the key near term support at $1117.30. The initial support at $1125.50 on the intraday hourly chart was breached yesterday and the sequence of lower highs over the past couple of days suggests using rallies as a chance to sell. The old key long term floor around $1132 seems to be playing a role on the near term chart too and is the initial resistance. If a weak Payrolls report is seen today there could be a bigger spike so further resistance comes in at $1142.60 and then the key level at $1146.20. Under $1117.30 is the key reaction low at $1109.15.

WTI Oil

There is no let-up I the volatility on WTI. What had previously looked to be the potential for a head and shoulders top has been completely aborted as another spike high in the price has improved the outlook once more. I have noticed how the Fibonacci retracements of the $61.50/$37.75 sell-off are beginning to play a role. The 23.6% Fib retracement especially has caught some key lows at $43.36 in recent days, whilst the original sharp rebound to $49.33 got to within around half a percent of the 50% Fib retracement at $49.62. However when drilling down into the hourly chart we find once more Fibonacci working well as a gauge of support/resistance. The retracements of the $37.75/$49.33 rally are also playing a near term role too. The 50% Fib retracement at $43.54 is a great level of near term support and 23.6% Fib (at $46.60) has also played a key role in the past couple of days. Breaking through 23.6% Fib of $37.75/$49.33 has re-opened the highs once more, whilst momentum indicators are also positive. It seems as though the bulls are fighting back again.