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How will the USD react?

Fri, Apr 4 2008, 08:12 GMT
by John Hardy

Saxo Bank

Canada employment report and Ivey PMI also on tap today. Risk appetite still appears strong - but for how long...

MAJOR HEADLINES – PREVIOUS SESSION

Overnight developments:

• US Mar. ISM Non-manufacturing out at 49.6 vs. 48.5 expected and 49.3 in Feb.

• Australia Feb. Retail Sales out at -0.1% vs. +0.3% expected

• Switzerland Mar. CPI YoY out at 2.6% vs. 2.5% expected

THEMES TO WATCH – UPCOMING SESSION

Key event risks today (all times GMT):

• Germany Feb. Factory Orders (1000)

• Canada Mar. Unemployment Rate (1100)

• US Mar. Change in Nonfarm Payrolls (1230)

• US Mar. Unemployment Rate (1230)

• US Fed's Pianalto to speak (1245)

• Canada Mar. Ivey PMI (1400)

• EuroZone ECB's Bini Smaghi to Speak (1600)

Market Comments

Yesterday's atrocious weekly jobless claims reading from the US immediately capped the short sharp USD rally that was underway at the time. The 407k reading was the worst number since the months immediately following hurricane Katrina in late 2005 (in fact, the last three weeks of data in a row have ALL been above levels seen since then - with yesterday's reading by far the worst). This suggests that today's nonfarm payrolls could be far worse than the -50k that is supposedly expected (might we throw out a number like -250k, though this data is so thoroughly manipulated and statistically adjusted that any attempt at accuracy is a fool's errand). We can expect the Unemployment report to bounce back up to 5.0% as well (this is already market consensus).

It would be rather simple and straight forward to simply call for USD weakness if we see a truly ugly unemployment report today, but the market reactions to yesterday's claims data and the Fed's continued moping about the economy are inconsistent and confusing. US 2-year yields are still very close to highs for the month and the rate differentials vs., for example, the EuroZone, have not ticked back up in favor of the Euro. What gives? We're not sure we have an explanation, but perhaps today's employment report and the subsequent reaction will get things back in synch. Looking at EURUSD, we have a bullish hammer candlestick on the daily chart, and it was nearly also an outside day, so short term bullish technicals contrast with lack of fundamental support from rates. Bears will need another sell-off through 1.5500 to get their hopes up as the upside appears the side of least resistance from a technical perspective.

On the risk appetite front, the market continues to find encouragement in the narrowing of credit spreads of late and stocks somehow continue to shrug off the risks of credit crunch woes and this is keeping JPY and CHF on the weak side as one would expect. EURCHF continues to pound on the big 1.5850/60 area and may have a go at its 55-day moving average a bit higher if risk appetite remains high. It's hard to imagine a new big wave of strength in carry trades, however, so we still look for a pivot point in these trades soon. Equity markets will lead the way.

The Australian dollar is suffering a bit after an ugly Retail Sales report overnight and as the RBA's Stevens underlined the market's impression that Aussie rates are going nowhere in the near future. On inflation, Stevens said that "Inflation will start to abate, though it will take a while." Still, the technical outlook on AUDUSD is very uncertain between 0.9000 and 0.9250 and will pivot depending on the direction of equities.

Chart: USDCAD

USDCAD fell through the 200-day moving average and is now probing the 55-day moving average not far above parity. Canada also has its monthly employment report today as well as the Ivey PMI data point. Looking at the USDCAD chart over the last several months, it seems as if every time the pair tries to pull away from parity (drawn with the blue line), whether to the downside or to the upside, it is pulled back like a magnet. In any case, current levels look like an important pivot area for the pair, as a close below parity could open up for another probe at the bottom of the longer term range, while current levels are close to final support for the recent rally.

Published on  Fri, Apr 4 2008, 08:15 GMT