Canadian Dollar: Is there Breakout Potential for Loonie Crosses on Jobs Data?

• Dollar and Yen Surge as Dow and Risk Appetite Collapse but what is Left for Friday's NFPs?

• Euro Traders Bypass ECB Rate Decision to Focus on Surge in Credit Risk for Greek, Spain, Portugal

• British Pound Finds Little Stability in the BoE’s Hold on Rates, Pause in Bond Purchases

• Canadian Dollar: Is there Breakout Potential for Loonie Crosses on Jobs Data?

Dollar and Yen Surge as Dow and Risk Appetite Collapse but what is Left for Friday’s NFPs?
Both the US dollar and Japanese yen responded to the dramatic plunge in market-wide risk appetite today by falling back on their role as safe havens currencies. While the yen crosses were perhaps more volatility in their declines, the greenback was the more influential currency owing to its prevalence as the world’s primary reserve asset. The dollar index rallied to highs not seen since July and EURUSD tumbled nearly 180 points to close well below 1.3750. Looking at a higher frequency chart of most of the major pairs, it was clear that the dollar’s strength was surprisingly consistent (versus short bursts of rapid moves). This is a good indication of trend; but fundamentally it suggests the move was orderly rather than set off by a specific event. Therefore, concerns over the credit health of certain European Union members or a sudden panic before Friday’s non-farm payrolls (NFPs) are not the culprit of such abnormal moves. Rather, today’s highly correlated move was the product of underlying fundamentals themselves out. A considerable level of risk premium has been built up through 2009 at the expense of funding currencies like the dollar and yen. However, without roaring growth to support a steady influx of capital and a jump in yields, sentiment has to carry itself – and perhaps with a little government health. As the effort to unwind carry positions continues, repatriation will keep both of the aforementioned currencies buoyant. Yet, when these flows dry up; the true economic and financial characteristics of a ‘safe haven’ will no doubt bolster the appeal of the greenback. Though, the current bear wave may not last long enough for this transition to fully take place.

Shortening our horizons to cover just the end of this week, traders’ favored and most market-moving economic indicator is scheduled for release early in the US session (at 8:30 EST). The US NFPs have long been the top driver for the FX market because it is considered a clear measure of economic health for the world’s largest economy. However, the data’s impact has recently tapered off – and for good reason. The US shed over 7 million jobs between January 2008 and October 2009 (and these are official numbers that do not account for those that were discouraged and subsequently left the labor market).
Fundamentally, the recent improvement in the pace of net monthly losses and the modest increase printed in November’s revised 4,000-person increase does not compensate for the considerable damage exacted over the past two years. However, investors and traders work on speculation. A tentative return to positive monthly readings is another sign that the economy is in fact improving. On the other hand, this is good news only when market participants are looking for a reason to invest in the market. Should risk aversion dominate, the reality of the situation will weigh heavy; and the glut of recently unemployed combined with the constant influx of new workers will appear daunting. In the end, the dollar will not likely respond to this data with a bullish reaction for a positive reading. The dollar’s response will be defined instead by how investors in other asset classes (particularly equities) respond. Should today’s bearish momentum carry through, this indicator can be manipulated to fit the prevailing sentiment. To establish the next leg of a position unwinding and risk aversion, there are important levels the market must pass. The Dow must push 10,000; EURUSD must clear 1.3725; and Crude has to drop below $72.50.

Euro Traders Bypass ECB Rate Decision to Focus on Surge in Credit Risk for Greek, Spain, Portugal
While the euro is typically jostled by the indirect influences of the US dollar and that benchmark’s own response to underlying risk trends; the currency found its own fundamental momentum today. This morning, the market was patiently awaiting the ECB’s official decision on interest rates and President Trichet’s regular commentary following the announcement. As expected, the policy authority left the benchmark unchanged at 1.00 percent; and the lead policy regulator would offer few concrete comments on a timeframe for the eventual change from a neutral to hawkish bearing. On the other hand, there were highlights. Once again Trichet signaled rates were “appropriate” (a word now associated with firmly neutral stance); and he suggested that draining liquidity was the first option when inflation pressures started to appear. The more appropriate topic though was his vote of confidence that Greece’s plans to reduce its deficit would work. The market clearly did not share this point of view when credit default premiums on sovereign debt from Greece, Portugal and Spain among others surged on the day. Making matters worse, Greece’s second largest union approved its second mass strike this month. Warnings that the EU is on the verge of anarchy are premature; but these problems will not soon disappear given the state of the member economies and the rules they are bound by.

British Pound Finds Little Stability in the BoE’s Hold on Rates, Pause in Bond Purchases
Of the two central bank decisions today, the Bank of England’s efforts would be the most remarkable. Though the target lending rate was left unchanged at 0.50 percent, the decision to pause the bond purchasing program was the first step towards neutrality for this massive stimulus policy since its inception in March. Is this the first step towards an official rate hike? Yes and no. While capping stimulus programs is an essential first step towards tightening the reins; the United Kingdom has a long way to go before the economy is well enough in its recovery that support can be removed. The group said further bond purchases “would be made” if it were necessary – pointing to a wait-and-see approach as they balance near-term inflation and the pain of a ballooning deficit. Furthermore, the BoE is unlikely to make big changes before the general election.

Canadian Dollar: Is there Breakout Potential for Loonie Crosses on Jobs Data?
It is usually the case that the Canadian labor data is overlooked in favor of the more market-friendly US payrolls figures. Fundamentally this makes sense given the economic ties between the two nations. However, if we are looking for a fundamental catalyst for USDCAD to finally overtake 1.0750 (besides another dive in risk appetite that leverages the greenback), the combination of a relatively strong NFPs and disappointing Canadian reading can provide a good burst of volatility. The consensus calls for a small increase in net employment.