Forex - USDJPY Preferred Pair To Trade Dollar Strength

Forex News and Events:

It’s a typical Non-Farm Payroll Friday, with most currency traders hitting the pause button ahead of the significant economic release later in the day. Although the median estimate is for a 0k change, the amount of variation between individual forecasts is extremely large; with Bloomberg’s survey of 76 economists producing a range of estimates from -100k to +85k. Not only is the level of ambiguity in predicting the absolute number quite high, but there is also significant uncertainty as to how FX markets will treat either a good or bad number. Recent correlations seem to suggest that better US data has spurred subsequent USD weakness; but on last month’s much better than expected payrolls, the -11k print caused an aggressive bout of USD strength. We therefore feel that the psychological bias lends itself to USD strength; a slight downside miss in the analysts’ estimates will be unlikely to cause major tumult for FX markets, but an upside surprise – even on a tiny scale – would represent the first positive payroll change since December 2007, and therefore be likely to cause major covering of USD shorts. Furthermore, in playing USD strength, we continue to favour USDJPY as the most potent pair to trade; despite Japan’s Finance Minister today backtracking partially on his explicit comments calling for USDJPY at 95.00. Whether planned or accidental, the rhetoric encouraging JPY weakness certainly had the desired effect in the markets, with USDJPY remaining elevated after its break of 93.22 yesterday. So far the pair has hit a peak of 93.77, but the pre-payroll jitters are causing a bit of corrective selling at the start of the European session. So far the data releases out of Europe have had limited impact on FX rates; the first major data of the morning was Swiss Unemployment which came out exactly in line with consensus at 4.2%, ticking up slightly from last month’s 4.1%. So far, USDCHF has had a choppy session but remains locked in a tight 30 pip range. Norway’s disappointing Retail Sales (at -1.2% MoM vs. 0.4% expected) were quickly disregarded, with EURNOK largely unchanged at 8.1800 after a brief spate of volatility. GBP is the outperformer on the day so far at 1.6030 after encouraging PPI data revealed higher than expected output prices (0.5% vs. 0.2% expected) relative to input prices (0.1% vs. -0.2% expected).

Today's Key Issues (time in GMT):

10:00 EUR Final GDP, % q/q Q3 exp: 0.4 prev: 0.4
10:00 EUR Unemployment rate, % Nov exp: 9.9 prev: 9.8
11:00 EUR Germany: Industrial production, % m/m Nov exp: 1.0 prev: -1.8
13:30 USD Change in nonfarm payrolls, thous Dec exp: 0 prev: -11
13:30 USD Unemployment rate, % Dec exp: 10.0 prev: 10.0
15:00 USD Wholesale inventories, % m/m Nov exp: -0.3 prev: 0.3

The Risk Today:

EurUsd Very tight range today (1.4288-1.4335) ahead of today's NFP, still eyeing topside resistance ahead of 1.4500, and beyond there the major hurdles at 1.4600 and 1.4685. If we look on the daily chart, there is a flag formation being carved out with downside support currently coming in around 1.4280, and if breached we can expect a continuation of the downtrend that has been in play since 4th Dec (break of the 12-month uptrend). It may be a difficult move lower however with support lying in wait at 1.4252 (200 day moving average), and range lows at 1.4210.

GbpUsd Previous support at 1.6050 now turns into decent resistance with plenty of selling interest lined up between 1.6050-70. We are still looking for a revisit of 1.5833 (Dec 30 lows) after the break of 1.6000 earlier in the week, but for now there is some retail interest providing near-term support around 1.5900 levels. If we re-enter the range, the 200-day moving average at 1.6112 forms first area of good supply, and beyond there expect prior resistance levels to still be in play: 1.6248 (Dec 18 highs), followed by 1.6323 (100 day moving average), and above there the 1.6400 psychological barrier.

UsdJpy USDJPY has been well bid over the past few sessions, but it still looks like we will remain range bound between the range lows of 91.10 lows and decent supply ahead of 94.00. A break below 91.10 would indicate a resumption of the larger downtrend that has been in play since mid 2007, but this seems like the less likely scenario in our view. Look for bids ahead of 91.10, and plenty of offers coming in around today's highs at 93.77 to contain the pair; but obviously the direction from here hinges greatly on today's NFP.

UsdChf Range-trading prevails in USDCHF between 1.0280 and 1.0425 (and an even tighter 1.0326-1.0358 range today), but decent support above the 100-day moving average (1.0287 currently) does seem to favour further USD strength from here. Next levels to watch outside the range are 1.0508 key high and beyond there the 1.0700 major resistance (38.2% correction of the move from 1.1970 down to 0.9918). Near term support stands at 1.0320 ahead of 1.0220.

Resistance and Support: