Non-Farm Payrolls Could Hurt the Dollar

• Non-Farm Payrolls Could Hurt the Dollar
• 5 Reasons for Euro Short Squeeze
• USD/CAD Reverse Gains as Oil Resumes Recovery
• AUD Shrugs Off Mixed Retail Sales
• NZD Supported by Risk Rally
• GBP/USD Hits 1 Month High

Non-Farm Payrolls Could Hurt the Dollar

Investors reduced their exposure to U.S. dollars ahead of Friday's non-farm payrolls report, which is smart considering that payrolls could pose a short-term risk to the greenback.  Every month we look at 8 different economic reports to gage how NFPs will fare and unfortunately this month, the majority of the reports point to a softer release. Both the service and manufacturing sectors saw job losses in the month of January, ADP reported a smaller increase in corporate payrolls, while Challenger reported an increase in layoffs.  While the 4-week moving average of jobless claims remains low, it inched up over the past month.  The only argument in favor of stronger payrolls is confidence which surged to multi-year highs last month but that may have been driven primarily by a decline in oil prices.  We are still looking for healthy job growth but after the sharp improvement in the unemployment rate last month, a more modest outcome could be store.  Economists are looking for job growth to slow to 230k from 252k and for the jobless rate to remain unchanged at 5.6%.  If payrolls rise less than 200k, we could see a stronger rally in EUR/USD and a steeper decline in USD/JPY because a weak report would lead investors to think that the Federal Reserve will be more patient with raising interest rates.  A stronger report however would be extremely positive for the greenback by hardening expectations for a 2015 rate increase. If the amount of job growth and the jobless rate are close to expectations, the focus will be on wage growth.  Average hourly earnings are expected to rebound after falling for the first time since October 2012 and an increase in wages would help to offset any downside surprise in non-farm payrolls. 

January Non-Farm Payrolls Outlook

Arguments for Stronger Payrolls

1.     Consumer Confidence Hits Highest Level Since August 2007

2.     University of Michigan Consumer Confidence Index Rises to 11 Year High

Arguments for Weaker Payrolls

1.     ISM Non-Manufacturing Employment Component Falls to Lowest Since Feb 2014

2.     ADP Employment Change Drops to 213K from 253K

3.     Challenger Grey & Christmas reports 17.6% rise in layoff announcements

4.     Jobless Claims 4 Week Moving Average Rises to 292.7k from 290.5k

5.     Continuing Claims Rises to 2.40 million from 2.5352 million

6.     ISM Manufacturing Employment Component Drops to 54.1 from 56

5 Reasons for Euro Short Squeeze

1.     Greek government reassures market that they are working hard to reach a deal

2.     EU Upgrades 2015 Growth Forecasts, German Factory Orders Bounce

3.     SNB Buying EUR/CHF

4.     Oil Recovery Boosts Risk Appetite

5.     Concerns about Non-Farm Payrolls

A variety of different factors contributed to the short squeeze driven rally in EUR/USD today including the Greek government's attempts to reassure investors that they are working hard to reach a deal with their creditors.  Last night the euro fell sharply after the ECB rejected Greek debt as collateral but the currency recovered after investors realized that Greece can still borrow from the ECB through the Emergency Lending Assistance (ELA) facility. The market is still waiting with bated breath for Greece to announce a deal with the Troika and based on the performance of the EUR/USD, investors are optimistic that it will happen.  The euro was also supported by the EU's increased growth forecasts and stronger than expected German factory orders.  The European Commission now sees 1.3% GDP growth in 2015 versus a previous forecast of 1.1%.  They feel that conditions are in place for sustained growth and job creation and while they acknowledge the downside risks have intensified, they also see new positive factors. Additionally, the rebound in oil prices helped to lift risk currencies like euro while talk of EUR/CHF buying by the Swiss National Bank lent support to the currency. Finally concerns about non-farm payrolls drove the dollar lower and euro higher.  How EUR/USD trades over the next 24 hours will hinge on the strength of the NFP report and any new developments on the Greek-Europe debt talks.  It is also worth mentioning that Denmark cut interest rates for the fourth time this year to -0.75% in an attempt to curb gains in the krone.

USD/CAD Reverse Gains as Oil Resumes Recovery

All three of the commodity currencies traded higher against the greenback today. The strongest gains were seen in the Canadian dollar, which recovered all of yesterday's losses on the back of stronger trade numbers and a renewed recovery in oil prices.  WTI crude rose as much as 5% today reviving talk that oil prices have bottomed. Canada's trade deficit increased in the month of December to -C$649 million from -C$335 million but economists were looking for the gap to extend beyond a billion.  Strong demand for metal exports offset lower oil shipments. The data is still weak but not nearly as ugly as it could have been. Canadian employment numbers are scheduled for release tomorrow and we are still looking for a weaker release given the decline in the jobs component of IVEY PMI. The improvement in risk appetite also lifted the Australian and New Zealand dollars despite mixed Australian retail sales numbers.  While spending ex inflation was stronger in the third quarter, retail sales growth fell short of expectations in December.  There was also talk that China's demand for iron ore remains strong, lending support to the currency and commodity. 

GBP/USD Hits 1 Month High

The British pound broke out of its month long trading range against the U.S. dollar, rising to its highest level in a month.  Better than expected U.K. data and a broad based decline in the greenback supported the rally in sterling.  According to Halifax, house prices rose a whopping 2% in the month of January. This increase follows a series of improvements in the PMIs that show a pickup in manufacturing, service and construction sector activity. The outperformance of the U.K. economy is becoming abundantly clear and while sterling did not enjoy broad based gains today, we are still looking for new highs in GBP/AUD and new lows in EUR/GBP.  As expected, the Bank of England left monetary policy unchanged this morning.  The rate decision was a nonevent for the currency.  U.K. trade numbers are scheduled for release tomorrow and given the improvement in manufacturing activity, another positive surprise could be in store.  The break of the 1.5270 range high in GBP/USD puts the currency pair on track to reach 1.54.