KBC Market Research Desk
KBC Bank
Good payrolls to support the dollar, but….
On Thursday, the China‐driven market crisis continued unabatedly. Contrary to previously, this resulted in a ‘normal’ risk‐off trade in the major FX cross rates. The carry funding currencies advanced, with the euro this time taking the lead. The gains of the yen against the dollar were less pronounced. A late session down‐leg on the US equity markets put additional pressure on the dollar. USD/JPY closed the session at 117.67 (from 118.47 on Wednesday). The loss of the dollar against the euro was even more pronounced, as EUR/USD closed the session at 1.0932 (from 1.0781).
This morning, Asian markets entered calmer waters. The PBOC fixed the yuan marginally stronger compared to yesterday. The off‐shore yuan opened stronger as well, but returned most of the gains. Trading on Chinese equity markets remains volatile after Chinese authorities suspended the 7% circuit breaker. At the moment of writing, Chinese indices show about 3% gains. Most other Asian indices show modest gains. The easing of tensions in China also helps the dollar off the recent lows against the euro and the yen. USD/JPY trades currently in the 118.35 area. EUR/USD is changing hands around 1.0875. Oil is off yesterday’s low with Brent trading at $ 34.25 p/b.
Today, the focus is on the US payrolls report, while in the euro area, only some second‐tier data are on the agenda. Also in the US, Fed’s Williams and Lacker are scheduled to speak. Despite rather mixed US eco data over the last few months, the labour market recovery remains on track for now. The consensus is looking for an increase in non‐farm payrolls by 200 000, broadly in line with last year’s trend. We see upside risk for today’s payrolls. Strong payrolls should support the case for the Fed gradual tightening scenario (the dots suggested 4 hikes) and for a stronger dollar. At the same time, markets will read the outcome of the payrolls in the light of the recent global developments.
Over the previous days, US and EMU eco data were often ignored. We don’t expect the FX market to ignore a substantial (positive) surprise in the payrolls, but dollar gains may be guarded. Indeed, it is too early to conclude that China driven volatility is over. To conclude: we expect a good payrolls report (our preferred scenario) to be moderately positive for the dollar.
On the other hand, disappointing payrolls might intensify investor concerns and weigh on the dollar. There is even risk for an asymmetrical reaction (bigger los in case of a poor report). Earlier this week, we didn’t jump on the EUR/USD decline even as the technical picture turned negative after the break below 1.08, but favoured to sell EUR/USD higher in the trading range (e.g closer to the 1.10/1.11 area). We maintain that view and stay cautious to buy the dollar already at current levels, even as we see chances for positive short‐term reaction to the payrolls.
From a technical point of view, EUR/USD failed to regain important resistance (previous range bottom/break down at 1.1087 and the 62% retracement from the October high at 1.1124) after the December ECB meeting. This week, EUR/USD dropped temporary below 1.0796 (07 Dec low), deteriorating the short‐term picture. However, this attempt was finally rejected too. Next support is at 1.0650 (76% retracement off 1.0524/1.1060) and at 1.0524. On the topside, 1.1004 (reaction top) is a first important reference. Next resistance comes in at 1.1060 (15 Dec top) The picture for USD/JPY remains negative below 120. The 118.07 level (15 Oct low) was (temporary?) broken yesterday. Next support comes in at 116.18 (August low).
EUR/GBP nears key 0.7493 support
Sterling was hit hard yesterday. The global risk‐off trade, a downleg in the oil price and heavy selling in commodity‐related equities all conspired against the UK currency. Cable regained some ground late in the session (USD weakness and maybe due to the rebound in oil). Cable closed the session at 1.4618 (from 1.4630). However; EUR/GBP closed the day at 0.7478; near the intraday high and also within reach of the key 0.7493 resistance.
Today, the UK November trade data will be published. A ‘substantial’ improvement is expected,. We take asimilar view from the consensus. The report might be mildly positive for sterling, but it won’t be a game changer.
Global factors continue play an important role for sterling trading. Yesterday, sterling was initially hit hard by the China‐related risk‐off trade and by the decline in the oil price. The jury is still out, but yesterday’s late‐session rebound in cable might be an indication that the GBP sell‐off was a bit overdone shortterm. A sustained rebound of sterling will be difficult unless there are signs of progress in the Brexit debate or unless risk sentiment improves. For now, we look out whether the key 0.7493 (Oct top) holds. A drop below the 0.73 area would call off the ST uptrend, but this looks unlikely short‐term, considering the price action earlier this week. The technical picture of sterling against the dollar remains fragile. The key GBP/USD 1.4566 (2015 low) was extensively tested yesterday, but for now no sustained break occurred.
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.
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