NFP Needs March Madness

by: Dean Popplewell

Global currency direction for Q2 relies heavily on two events following the script this week, the first was yesterday's ECB rate announcement and the second is this morning "granddaddy" of economic indicators - US non-farm payrolls report. Capital markets expects a strong headline print, investors require one, while global economies need one. Therefore it's really not much of a surprise to see equity indices and major currency values trade in a holding range ahead of the critical 08:30 EST release. The market is quietly hoping that the release, being the first print since the spring thaw, has possibly "unshackled" economic data from the "drag of the polar vortex." Despite recent conflicting employment indicators - like yesterday's ISM services employment component being very strong, while the Online Conference Board job listings data was suspiciously underwhelming - the market is calling for healthy +200k new jobs with an unemployment rate to ease to +6.6%. Anything with a two-handle makes it a new four-month high.

Yesterday, the ECB is seen as having succeeded this time around. Draghi came and delivered. Importantly, his dovish talk was sprayed with more dovish color, which has gone a long way in convincing the markets that they are capable of "completing the walk." Importantly, Draghi specifically mentioned QE and also went to great lengths to illustrate that the ECB's Governing Council are unanimous on the possibility of using further "non-conventional" tools. Not surprisingly, Draghi noted that there was a good deal of attention on a move to a negative depo rate and also lowering of the corridor. However, for the EUR bear, the key to their winning short positions was the ECB's active discussions around QE and that the "prospect of such a move would be raised the longer inflation remains at subdued levels" - again highlighting the ECB's determination to use all means at its disposable to fight deflation. The market has since reacted by selling the 18-member single currency across the board (EUR/USD floating around its one month low just below the psychological €1.3700 print). The left hand side action in EUR/JPY (¥142.34) has managed to cap the USD/JPY rally just below ¥104.00 for now. Whether or not further profit taking continues today is down to one thing - the US BLS employment report.

On the fundamental side for the eurozone, market focus now shifts to this month's HICP (Harmonized Index of consumer prices) release. For investors the hardest part will be figuring out what economic release will be the one to disappoint. Following on from Fed Chair Yellen's points earlier in the week, data developments both in the US and in Europe will have to validate the policy expectations set by the ECB and by the Fed, so perhaps we will get to hear more noise around the bigger releases.

For this morning, investors have got the green light. Everything seems to be pointing towards a strong headline print. An upward revision to February's ADP print, coupled with the stronger job components in yesterday's ISM print has many convinced that "March" is the month that is about to convincingly break the weather related monotonous reports that have been delivered so far this year. It seems US traders are just itching to jump back into long dollar positions and sell Treasuries - there is a lot riding on this morning's NFP release, especially after Fed Bullard's remarks this week suggesting a potential Fed rate hike in Q1 2015.

For many individuals the path of most pain would be a significantly lower NFP print in the region of +150k. Throw Yellen's dovish comments made earlier in the week back into the mix and investors will be back trading the perverse price action of an equity and credit rally while the forex market returns to its ping-pong ranges. To break this FX boredom, investors require a healthy +230-250k print. This would encourage a new USD bull trend, the first in a frustratingly directionless year so far. A robust NFP print would have the EUR/USD quickly test support 1.3655, while USD/JPY will want to check out and see what lies above 104.50-60, maybe if it's strong enough 105 would certainly please Japan's Abe. The fixed income crowd will want to be pushing US 10-year yields towards that psychological +3% level.

If anything, this market is long USD, and a disappointing number may actually create more volatility but not for long. With a job miss close to +150k USD/JPY could be eyeing 103 in a hurry while the EUR will want to stretch its legs and head towards 1.38 again.

Forex heatmap