Forex - Non Farm Payrolls And G7 May Buoy The Dollar

Forex News and Events:

Forecasts for today’s NFP are being adjusted since this month’s ADP report painted a bleak picture of the labour market. Although the headline consensus remains -175K, we believe that market expectations may have shifted to a more negative reading in light of a week of downside surprises from the US. There is still all to play for however, as the predictive power of the ADP report for NFP is notoriously poor; indeed NFP may well be the only likely source of an upside surprise for risk appetite. Next week will see the start of Q3 earnings season, and with the S&P up around 15% since last quarter, the scope for earnings to beat investor expectations is extremely limited. This comes after yesterday’s news that CIT Global Inc. is once again tip-toeing the line between re-structuring its debt and filing for bankruptcy protection. As one of the largest lenders to small/mid-size businesses in the US, CIT has already received an emergency loan from its major creditors this year, in addition to the billions of dollars in federal bailout money last year. Markets are also wary of the upcoming G7 meeting in Istanbul as recent rhetoric from Japan’s Fujii as well as Europe’s Trichet and Almunia have pertained to currency imbalances, and many are speculating the USD could well benefit from any repeat statements about the importance of a strong USD (or conversely, negative impact of EUR strength).

Today's Key Issues (time in GMT):

09:00 EUR E16 : PPI, % m/m (y/y) Aug exp: 0.4 (-7.5) prev: -0.8 (-8.5)
12:30 USD US: Change in nonfarm payrolls, thous Sep exp: -175K prev: -216K
12:30 USD US: Unemployment rate, % Sep exp: 9.8 prev: 9.7
12:30 USD US: Avg hourly earnings, % m/m (y/y) Sep exp: 0.2 (2.6) prev: 0.3 (2.6)
12:30 USD US: Average weekly hours Sep exp: 33.1 prev: 33.1
14:00 USD US: Factory orders, % m/m Aug exp: 1.1 (-18.9) prev: 1.3 (-23.2)

The Risk Today:

EurUsd For the last 24 hours the medium term bulls on EUR USD have continued to defend the support between 1.4520 and 1.4550 with great determination. In the process they have put in yet ANOTHER neckline in what is shaping up to be a huge compounded head and shoulders that if broken targets 1.4220. (see 2 hour chart over 3 months). The stops building below 1.4500 must be getting pretty large too but below there we have support and the 12 month uptrend line at 1.4445 (see daily chart over 1 year) so here is a possible scenario - we break 1.4520 properly, followed by 1.4500 and stops get triggered down to 1.4445 where we catch a strong bid on the uptrend line and support, trading back up to the neckline breakdown at 1.4520. A failure to hold above 1.4445 on a 2 hour closing basis increases the likelihood of the 1.4220 target being reached tenfold. Non Farm Payroll number due at 14:30 but any move higher before that number will likely meet shorting in the 1.4580 region where we have the 2 week downtrend channel and significant short term resistance.

GbpUsd Looking at cable on a daily chart today, just to identify the crucial levels should this neckline break clearly. The next major support is at 1.5724 and believe it or not, a break there will then be looking towards 1.5360 and the final target of the head and shoulders is all the way down in the 1.4920 area. In the event that GBP USD did make a miraculous sharp move higher in the coming days the long term bears can be expected to keep things under control, shorting more at 1.6272 and above there at 1.6470.

UsdJpy We spoke yesterday about trading the 15 minute uptrend with a very tight stop and no less than an hour later the stops were triggered and the pair dropped 50 pips over the morning. The trend is down on all time frames but is near very significant support so expect more consolidation over the coming hours.

UsdChf Perhaps one of the clearer pictures of USD direction can be seen on USD CHF, again very similar to EUR USD. The pair is now resting on the neckline of the inverse head and shoulders where the USD bulls have been accumulating and supporting the pair above 1.0400. Those playing the inverse H&S formation will likely join in the long entry at these levels (1.0405 at time of writing) with a stop below the uptrend and neckline at 1.0360. The target on this formation is 1.0632 so there is a very healthy risk reward profile for the bulls this morning.

Resistance and Support: