The Big Picture

Monetary policy divergence, not economics, powering USD higher The dollar was generally higher against most G10 currencies despite disappointing data. The key reason is probably the monetary divergence between the US and Europe in the first place but most other countries as well, which was emphasized yesterday by ECB President Draghi’s explanation of the details of Europe’s QE program.

Draghi initially sent EUR higher with upward revisions to the ECB’s growth forecast and an optimistic inflation forecast for 2017 of 1.8%, conveniently just hitting their target of “close to but below 2%” and therefore precluding extending QE past the Sep. 2016 cut-off date. But the rally quickly ended after he said that the ECB would not buy bonds below the deposit rate of -0.20%. Since German two-year yields were trading below that level before the announcement, it implied that they will have to buy bonds further out the German yield curve, meaning more curve flattening and further reduction of the risk premium on long-dated euro assets. This makes European bonds less competitive with Treasuries or Gilts and therefore this could weigh on the common currency. Draghi also said that the Bank would have no problem in finding enough bonds to buy and noted that half the Euro-area debt is held outside the Euro area. This implies that a lot of the sellers will be foreigners, who are likely to take profits on their EUR bonds and reinvest the money in higher-yielding Treasuries or Gilts.

The dollar’s strong performance came in the face of more negative surprises as initial jobless claims edged higher and US factory orders fell for the sixth consecutive month (contrary to expectations of a rise). US economic news continues to disappoint -- perhaps due to the snowstorms or the port strike -- while European news continues to surprise on the upside. It doesn’t matter though; it’s the divergence in monetary policy that matters, and the US seems headed towards tightening while Europe is clearly committed to QE. San Francisco Fed President John Williams, a voting member of the FOMC, yesterday said that mid-year may be time for a “serious discussion” about raising interest rates as the labor market nears full employment and inflation rebounds. The behavior of the FX markets though is in contrast to that of the equity markets; the S & P 500 is up 2.1% year-to-date in local currency terms, while the Eurostoxx 50 is up 15%.

USD/JPY is opening in Europe today back above 120, the third break of that level this year. The rise is significant, given that all we’ve heard recently from Tokyo are comments about the negative impact of the weak yen. For example, BoJ Board Member Takahide Kiuchi yesterday said small companies he met with had expressed the view that the weak yen is pushing up costs for them. The previous two times USD/JPY went above 120 it wasn’t able to maintain it for very long. If USD/JPY can stay above 120.00 for today, it may signal a new trading range for the pair.

Today’s highlights: Today is NFP day! The market consensus is for an increase in payrolls of 235k in February (one standard deviation range: 210k-260k). That’s down from 257k in January, but would only be a return to normal after the astonishing increases in recent months. On Wednesday, the ADP report showed that the private sector gained more than 200k jobs last month, suggested that nonfarm payroll figure may come in over 200k again for the 12th straight month, consistent with a firming labor market (although there is a lot of variation between the ADP and the NFP reports). In such a case, it will show that the US economy has added at least 200k jobs for 13 consecutive months. At the same time, the unemployment rate is forecast to have tick down one notch to 5.6% from 5.7%.

While much of the US economic data has been disappointing recently, as mentioned, jobless claims plunged the week that the payroll data was assembled, suggesting that today’s figure may avoid the worst of the weather-related disruptions. (New England saw a series of snow storms and Chicago recorded the coldest February since 1875.) Tax receipts have been trending steadily higher, implying that the pace of labor market growth remains steady as well.

On a less positive note, the rise in average hourly earnings is expected to have slowed a bit on a mom basis but remained stable at 2.2% yoy, still well below the 3% or more that was usual in previous recoveries. However, the slight deflation in the headline CPI released last week boosted real average earnings, confirming the Fed’s case that the labor market continues to improve. Even if the market gets worried about stagnant wage growth and sells the dollar, the setback should be limited as the currency will likely remain supported by the much more active easing taking place by other central banks internationally.

As usual, the dollar’s trend going into the employment report is almost more important than the report itself. Given the strong underlying demand for USD, any disappointment on a weak report is not likely to last long as buyers are likely to take advantage of any dips, in my view.

As for the rest of the indicators, Eurozone’s final GDP for Q4 is forecast to confirm the preliminary print and show a rise of 0.3% qoq.

From Norway, we get industrial production for January, but no forecast is available.

Canada’s building permits for January are also coming out.

Today we have speeches from Riksbank Governor Stefan Ingves and Dallas Fed President Richard Fisher speaks. Both spoke on Thursday as well.

The Market

EUR/USD takes 1.1000 after Draghi’s comments

EUR/USD continued its tumble after Draghi’s comments that the ECB is willing to buy bonds trading at a negative yield down to the ECB’s deposit rate. EUR/USD briefly managed to take out the 1.1000 (S1) psychological support line. A sustained break of that line would signal larger bearish extensions and initially aim for the 1.0915 (S2) obstacle, marked by the low of the 5th of September 2003. A strong US employment report today could be the catalyst for such a move. Our daily technical oscillators detect accelerating downside speed and amplify the case for a lower EUR/USD. The 14-day RSI entered its oversold territory and is pointing down, while the daily MACD, already negative, fell below its trigger, and points south as well. With regards to the broader trend, I believe that the pair is still in a downtrend. EUR/USD is printing lower peaks and lower troughs below both the 50- and the 200-day moving averages.

Support: 1.1000 (S1), 1.0915 (S2), 1.0800 (S3).
Resistance: 1.1100 (R1), 1.1150 (R2), 1.1260 (R3).

USD/CAD rebounds form the lower bound of the triangle

USD/CAD rebounded from the lower line of the triangle that had been containing the price action since the beginnings of February, but the advance was halted slightly below the key resistance line of 1.2535 (R1). A strong NFP print today could encourage the bulls to overcome that hurdle and perhaps hit the upper bound of a triangle. Switching to the daily chart, the rate is trading above both the 50- and the 200-day moving averages, something that keeps the overall upside path intact. A move above the upper line of the triangle is likely to pull the trigger for the 1.2800 (R3) zone, and perhaps signal trend continuation, in my opinion.

Support: 1.2370 (S1), 1.2275 (S2), 1.2115 (S3).
Resistance: 1.2535 (R1), 1.2665 (R2), 1.2800 (R3).

WTI pulls back to hit support at 50.60

WTI traded lower on Thursday, but hit support at 50.60 (S1), slightly above the 200-hour moving average and rebounded somewhat. Given that WTI is still printing higher peaks and higher toughs within the short-term upside channel, I would expect the forthcoming wave to be positive and aim for the resistance barrier of 51.75 (R1), which happens to be the 50% retracement level of the 17th - 23rd of February decline. A clear break above that hurdle is likely to trigger extensions towards the next resistance at 52.50 (R2), the 61.8% retracement level of the aforementioned decline. On the daily chart, WTI is still trading below both the 50- and the 200-day moving averages. Nevertheless, it managed to print a higher low on the 26th of February. A break above the 55.00 psychological zone is the move that would signal a forthcoming higher high and perhaps bring a trend reversal. For now, I would prefer to sit on the side lines as far as the overall picture is concerned.

Support: 50.60 (S1), 49.50 (S2), 48.65 (S3).
Resistance: 51.75 (R1) 52.50 (R2), 53.40 (R3) .

EUR/JPY stays supported by the 132.30 area

EUR/JPY hit resistance marginally below the 133.80 (R1) barrier and slid to trade near the 132.30 (S1) support and the lower bound of the black downside channel. As long as the pair is trading within that channel I would consider the short-term outlook to stay negative. A clear move below the 132.30 (S1) zone could prompt extensions towards the psychological figure of 130.00 (S2). Nevertheless, bearing in mind that the RSI tries to move away from its below-30 zone, and that the MACD shows signs of bottoming, I would stay careful that a minor bounce could be in the works before sellers take the reins again. On the daily chart, we see that the strong recovery from 130.00 (S2) remained limited near the 38.2% retracement level of the 29th of December – 26th of January plunge. The recent decline supports my view to treat the aforementioned recovery as a corrective phase of the larger downtrend.

Support: 132.30 (S1), 130.00 (S2), 129.25 (S3).
Resistance: 133.80 (R1), 135.30 (R2), 136.20 (R3).

Gold continues to gyrate around 1200

Gold continued to trade around the psychological barrier of 1200. The fact that the yellow metal is trading below the lower line of the flag and below the black downtrend line taken from back the high of the 22nd of January keeps the near-term outlook negative, in my view. The somewhat negative momentum is indicated by our short-term oscillators as well. The RSI stays below its 50 line, while the MACD stands below both its zero and signal lines. As for the bigger picture, a break below the 1190 (S2) zone is the move that would confirm a forthcoming lower low on the daily chart and perhaps signal the continuation of the fall from 1307.

Support: 1197 (S1), 1190 (S2), 1185 (S3).
Resistance: 1205 (R1), 1215 (R2), 1222 (R3).