Dollar Extends its Impressive Trend but not even NFPs could Maintain Thursday's Momentum

• Euro: Reassurances over Greece and Hints at Hawkish Monetary Policy Do Little for Speculators

• British Pound Sees a Critical Break against the Dollar but Other Crosses are Holding Up

• Canadian Dollar Struggles to Capitalize on Strong Employment Data

• Swiss Franc: SNB Intervention Quickly Losing its Influence over the Market

Dollar Extends its Impressive Trend but not even NFPs could Maintain Thursday’s Momentum
With the US non-farm payrolls (NFP) report scheduled for release; many traders believed Friday’s session could turn out to be another extremely volatile day for the dollar. While in fact the session would prove to be highly active, the impetus for the bustle wasn’t the event risk but rather the momentum behind underlying sentiment trends. Essentially, the recent trend towards risk aversion has become so pervasive that it has been able to overpower event risk that does not conform to the direct interest in unwinding high-yield positions. In the final three days of this past week, the benchmarks for the various asset classes have forged meaningful progress towards establishing a lasting bear trend that draws capital out of over-bought securities and redirects it to safe havens. This is particularly supportive of the greenback as the reversed flow of speculative funds means carry trades financed with dollar loans will encourage repatriation; and global investors will further look to the dollar for its liquidity and the backing of US Treasuries. Considering many risk-related assets (especially equities) are still in the early stages of their corrections, there is a good source of momentum. At the same time, the dollar has already retraced over 50 percent of the losses it accumulated against the euro through 2009. Does this mean the greenback’s rally can persist for as long as these other markets retrace? Unlikely. Eventually, the carry flows will be tapped and the correlation will start to break down. Yet, such a shift could still be a long way off.

In the meantime, it is worthwhile to reflect on the dollar’s reaction (or lack thereof) to the January labor data. The response to the December payrolls was substantial as risk appetite was sparked not by that month’s reading but the positive revision to the November figure to 4,000 jobs added. Psychologically, this positive reading was the ‘light at the end of the tunnel’ after two years of net losses. However, this milestone has been met and now the real fundamental considerations begin. With this Friday’s report, the 20,000 net loss was unexpected and the previous loss was nearly doubled to a 150,000 drop. On the other hand, the unemployment rate would fall from 10 percent to 9.7 percent – the biggest drop since 1998. For volatility traders, this data had little direction. To fundamentals traders, the improvement in the rate in the face of job losses was a sign of discouraged American’s dropping out of the labor pool. This is not a positive turn as those leaving the pool are still without jobs (not contributing to growth) and they will likely return when conditions improve. Nonetheless, this would inevitably end up a non-event. With over 8.5 million jobs lost since the beginning of 2008, it will take a considerable pace of large payroll increases to reduce the jobless rate while still handling new entrants to the labor force. Looking ahead to next week, the docket is exceedingly light. The bounce in risk trends and pull back in the dollar through the end of Friday suggests the bear trend won’t be overbearing for Monday’s open. On the other hand, without many fundamental hurdles to worry about; currency traders may be more confident in setting positions that look for developing trends.

Euro: Reassurances over Greece and Hints at Hawkish Monetary Policy Do Little for Speculators
The euro has shifted from a fundamentally neutral position within the FX spectrum to an outright bearish one. To some degree, the concerns over Greece, Spain and Portugal’s economic and financial problems have contributed to the drain on investor optimism. At the same time, the losses in the capital markets of these particular economies and the sharp increase in their credit default premiums are in themselves a consequence of broad risk aversion. Regardless of whether it was the cause or effect, the impact on the European region is unmistakable. ECB President Trichet, the Greek Finance Minister and many others have tried to reassure the market; but as long as fear is rising, those weakened economies will suffer the most.
Ultimately, it will be a long time before recoveries are stable, unemployment is worked down and deficits are trimmed; so another dynamic will have to change. Either risk appetite will have to improve or the hope of higher interest rates will have to compensate for the growing risks. ECB member Liikanen said the bank should start rolling back the non-standard policy efforts at the March meeting; but such a move doesn’t give a hard time frame for hikes, nor does it improve the fundamental condition of the Euro Zone.

British Pound Sees a Critical Break against the Dollar but Other Crosses are Holding Up
For GBPUSD, Friday’s plunge confirmed the break of an eight-month range. On the other hand, most of the other pound crosses would refrain from such meaningful technical developments; and the sterling would not even find a consistent direction. The reason for this lack of conviction can be traced back to the currency’s unique position in the risk spectrum. The economy is still struggling to recover and the upcoming general election could further exacerbate deficit concerns. On the other hand, growth seems to have turned the corner; and the outlook for rate hikes in the face of inflation are better than that with the Fed and ECB. Next week, risk appetite and the quarterly inflation report will top event risk.

Canadian Dollar Struggles to Capitalize on Strong Employment Data
Though its thunder was stolen by the approach of the US NFPs, the Canadian labor date for January proved impressive.
According Stats Canada, the economy added a net 43,000 jobs last month – nearly three times what was expected. More importantly, the unemployment rate fell to 8.3 percent to match its lowest level in nine-months. This turn in the rate offers considerable support for a genuine turn in labor trends, which would be a considerable boon to growth forecasts. So, while this data may not have factored in Friday, it will have carry over effect.  

Swiss Franc: SNB Intervention Quickly Losing its Influence over the Market
Though there was substantial volatility noted across the markets, no other move was as extraordinary as what was seen in EURCHF. Very early in the Asian session, this usually placid pair surged an incredible 300 points (nearly five times the average daily range for the past three months). For a pair whose economic ties are so close as to dampen the influence of risk trends and interest rate speculation, the most likely reason for this drive was another round of SNB intervention. With a move to risk aversion driving the rate lower, the central bank likely tried to jump start a momentum-led reversal. However, it is becoming increasingly clear that these policy officials cannot successfully fight the broader market.