Will the Dollar Hit New Highs on Non-Farm Payrolls?

• Will the Dollar Hit New Highs on Non-Farm Payrolls?
• Euro: 10 Rally-Less Days
• GBP: No Changes from BoE but Chance of 2015 Hike Diminishing
• AUD: Soars on Strong Building Approvals and Chinese Outlook
• NZD: 3 Straight Days of Gains
• CAD: Steadies Alongside Oil Prices

Will the Dollar Hit New Highs on Non-Farm Payrolls?

The recent price action in the forex market indicates that investors want to buy dollars but they are becoming hesitant at such lofty levels.  The dollar extended its gains against the euro, Japanese yen and Swiss Franc but ended the day well off their previous highs. Meanwhile the greenback traded lower against the commodity currencies as the rise in US equities encourages investors to reconsider taking on risk trades.  Has the greenback hit a top?  We believe that the answer is no but after extensive appreciation, U.S. dollar traders don't need much excuse to take profit on their long trades.  Based on the minutes from the most recent Federal Reserve meeting the U.S. central bank is still watching data carefully to determine the right time to raise interest rates.  When it comes to US economic reports there's nothing more important to the Fed than labor market numbers.  The December employment report is scheduled for release on Friday and the big question is whether the strength in November carried into December. Payrolls rose 321k in the last report, which was the strongest pace of growth since January 2012. At the time, the data completely blew out expectations with the market only looking for 230k job growth.  This month, economist expectations are just as modest with the consensus forecast looking for payrolls to rise by only 240k. The unemployment rate on the other hand is expected to fall to 5.7% from 5.8%. How NFPs will affect the dollar depends of course on the strength of the report, revisions and the consistency of the change in payroll growth versus the unemployment rate.  In many ways, the jobless rate will be more important than NFP. 

Every month, we look at 8 leading indicators for non-farm payrolls to predict the potential directional surprise and this month, there are more arguments for stronger than weaker payrolls. However after a strong November, a pullback in December is expected but the unemployment rate, which held steady last month can and should improve.  If payroll growth exceeds 250k and the unemployment rate declines, the dollar will climb to new highs but if it prints in line with expectations and the jobless rate remains unchanged, we could see more profit taking in the greenback.

December NFP Outlook                                                      

Arguments for Stronger Payrolls

1.     Rise in ADP Employment Change

2.     Rise in Consumer Confidence Index

3.     Rise in the University of Michigan consumer sentiment report

4.     4 week moving average of Jobless Claims drops to 290k vs. 314k

5.     Continuing Claims at 2.362M vs. 2.45M

6.     Rise in employment component of manufacturing ISM

Arguments for Weaker Payrolls

1.     Drop in Employment Component of Service Sector ISM

2.     Rise in Layoffs Reported by Challenger Grey & Christmas

Euro: 10 Rally-Less Days

The euro dropped to a fresh 9 year low against the U.S. dollar, marking the tenth consecutive day without a rally for the pair, the longest stretch of time since July when EUR/USD did not see a positive day for almost 2 weeks. Today's decline was driven by weaker euro zone data and ECB Coeure's comment that monetary policy must react to the drop the inflation. German factory orders fell 2.4% bringing the annualized pace of growth down to -0.4% from 2.6% the month prior. Producer prices also felt 0.3% while confidence in the economic and industrial sector weakened.  The only positive report was Eurozone retail sales, which ticked up 0.6% but it failed to offset the softer numbers.  Eventually cheaper oil and a cheaper euro will help turn the EZ economy around but it may be a few months before economic data starts to show consistent improvements.  With less than 15 days to go before the next ECB meeting, investors are bracing for quantitative easing.  We expect the ECB to preannounce QE the same way they did asset purchases by saying that details will be provided later.  Yet that will not stop investors from trying to figure out how large the program will be. How the EUR/USD trades tomorrow will largely depend on NFPs but Germany's industrial production and trade balance reports are also scheduled for release.

GBP: No Changes from BoE but Chance of 2015 Hike Diminishing

The British pound made another run for the 1.50 level setting a new 1-year low in the process. The decline was driven entirely by US dollar strength and the market's distaste for European assets.  The Bank of England left monetary policy unchanged today and the only piece of data that was released, the Halifax house price report showed prices rising by 0.9% in the month of December. Like the ECB the Bank of England has an inflation target. While the BoE is not in the position to lower rates, the recent decline in oil prices and slowdown in the manufacturing, services, and construction activity reduces the chance of tightening by the central bank in 2015.  The recent decline in Sterling against the US dollar reflects the markets waning expectations for a rate hike. We had been looking for the GBP/USD to hit 1.50 and while it attempted but failed to extend all the way down over the last 2 trading days, we are still aiming for that level. Yet with this in mind there's a very good chance we will see a rally before that happens, giving investors an opportunity to sell the currency pair at a higher level. UK trade and industrial production numbers are scheduled for release tomorrow and given the drop in the PMI manufacturing index chances are these numbers will be softer, although the the trade balance will be positively impacted by lower oil prices. 

AUD: Soars on Strong Building Approvals and Chinese Outlook

The Australian and New Zealand dollars traded sharply higher against the greenback today while the Canadian dollar ended the day unchanged. Everyone is watching oil, which ended the day pretty much where it started.  While some investors may interpret this as a potential bottom, the fact that oil remains below $50 a barrel suggests that the downtrend remains intact.  Until prices rise back above $50 in a meaningful way, the path of least resistance for oil is still lower.  The best performing currency pair today was the Australian dollar although the New Zealand dollar was not far behind. Building approvals in Australia rose 7.5% in the month of November, which was much stronger than the market's forecast for 3% decline.  Tonight retail sales and construction sector PMI numbers are scheduled for release and based upon the building approvals data there's a good chance for a rise in PMI. Retail sales on the other hand is a tough call because employment growth was strong but the sales component of PMI services fell sharply in the month of November. No data was released from New Zealand but the belief that lower oil prices supports growth in China has gone a long way to creating stability for the commodity currencies.