Keep Your Powder Dry Ahead Of NFP

by: Dean Popplewell

The headline U.S. GDP was a much larger pill to swallow than expected, the Fed announcement was anti-climatic, the Kiwi’s surprised by being less hawkish and now we find out that Europe’s backbone, Germany, is not on "sure" footing. You have just heard the 24-hours in the life of an FX trader. The toil for all their efforts was to see the "single currency" (the EUR is the most popular currency by choice to trade) cower within a 25-pip range.

Perhaps it’s more prudent to say that investors are weighing up the recent downbeat U.S. economic growth alongside decent expectations for tomorrows non-farm payroll report before wholly committing to ply their trade. This is certainly one way to explain the lack of excitement in the forex markets. Mid-week’s better than expected private sector jobs report has increased markets' expectations for a solid NFP report (+175k and +7.8% unemployment rate).

Yesterday’s U.S. GDP report was weaker than expected, declining -0.1% annualized in Q4. The bulk of the deficit was in the defense category and if we exclude this, the results were close to expectations. So, if the investor averages out the defense anomaly over a couple of quarters, one can get a better gauge of what’s going on in the market. Minus most of the "noise" and U.S. GDP was up +1.5%, a growth pace equal to recent years.

After two-days there were no surprises. The Fed left its asset purchase programs and guidance unchanged as expected. The communiqué noted that economic growth paused in recent months, citing weather-related disruptions and other temporary factors. The end market result saw U.S. rates coming off a tad, perhaps taking out an early exit premium and the dollar easing ever so slightly. Both actions would indicate that traders were looking for something more optimistic. By day’s end everything was kept close to home as we focus more on tomorrow.

Down under the Kiwi’s were the one to deliver a "smallish" surprise. Governor Wheeler was more "hawkish" than the market had been expecting. The RBNZ left their monetary policy unchanged, holding its OCR rate at +2.5%. Their statement mirrored may other central banks' rhetoric. It highlighted that the strong NZD, weak labor market, and fiscal consolidation were keeping inflation below the target range. Even improved market sentiment has contributed to lower bank funding costs and some reduction in mortgage rates. Growth is expected to strengthen over the coming year, which should reduce spare capacity and return inflation to the desired midpoint. In translation, RBNZ is probably on hold for the remainder of the year. This should favor NZD over an easing RBA bias.

Heading north to Europe now, landing in mighty Germany, we find that bund yields are under pressure this morning after it was announced that last month's retail sales plummeted. When seasonally adjusted, German December retail sales fell -1.7% on the month, well below the +0.2% growth expected. On the year and in real terms they have fallen -4.7%. Not helping the situation was the November print being adjusted down to +0.6% from the +1.2% initially reported. Hot on the heels of retail sales was a disappointing German labor report.

Germany’s resilient labor market took another hit this morning. Unemployment has risen above the psychological +3m mark for the first time in 12-months. The country’s labor agency reported that January’s unemployment now stands at +3.138m. On the plus side, including seasonal swings, German unemployment claims declined by -16k. The market was looking for an increase of +10k. All in all, things are not so rosy for Europe’s backbone and yet the single currency remains better bid!

Shifting stateside, the Chicago PMI will be today’s main focus. The index was revised down to 50.0 from 51.6 for December as a result of annual revisions earlier this week, and market consensus is looking for a small improvement to 50.5 for January. Weekly initial claims are expected to bounce off last week’s very low +330k level. The market does not expect this morning’s data to provide much directional guidance. In all probability forex traders will be trying to keep their powder dry ahead of NFP.

Despite taking a small hit on the back of weaker German numbers, the EUR is hanging tough. Month-end EUR demand, or more accurately USD selling, is certainly distorting some of the price action. The single currency is now floundering below the 1.36 option barriers. So far, risk from tomorrow's U.S. jobs report is suppressing some of the risk taking, However, do not be surprised that month-end dollar selling will probably want to look at this option level.

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