"US JOBS DATA WEEK" TO TEST THE USD RALLY, AND THUS MOST OF THE RECENT TRENDS IN FX, COMMODITIES.Summary
USD Forecast: Bullish/Neutral –
This week: Mostly Depends on Market Reaction to Job Related Data – See Below For List of Reports To Watch.
Longer Term: Moving Opposite Risk Appetite Except When There Is Positive Jobs Or Spending Data
- Events Sun.- Fed Chairman Bernanke Speaks, Mon.-ISM Mfg, Tues.-Pending Home Sales m/m, Factory Orders, Wed.- Challenger Job Cuts y/y, ADP Employment Change m/m, ISM Non=Mfg PMI, Crude Oil Inventories, FOMC Meeting Minutes, Thurs.- Unemployment Claims Fri.- US BLS Non-Farms Payrolls Change, Unemployment Rate
- US Dollar retreats as improved signs of global growth reduce its safe-haven appeal without advancing interest rate or stimulus exit expectations
- Short-term US Dollar view clouds on overbought options sentiment
- Key jobs data likely to force a surge in trading volume and volatility for the USD, and thus most FX, Commodity, Stock Markets
- The Dollar Index closed the month with a 4.1% gain, but finished the year with a 4.1% loss.Key Points
As the past month showed, any major movements in the USD literally rock all global asset markets. These are especially potent in forex and commodities, which are mostly priced in USDs, but also true for stocks. If you’ve no time to read the full analysis below (and you should), you must beware of the following events that will likely move most major financial markets this week. In sum, they are that are most likely to move the USD.Background
The 3 Keys To Understanding US Dollar Movements, And Why They Matter So Much
As we’ve repeatedly reminded readers, the three key types of event that move the USD are:
- Fear inducing events that play to the USD’s role as a safe haven currency
- Data that suggest improvements in US jobs and spending, the key metrics the Fed is using to determine the pace and size of stimulus reduction and eventual interest rate increases
- Anything that undermines the Euro and thus almost forces a move up in the USD
The 11 Must-Watch Events That Could Rock Markets
The coming week is so packed with US jobs data that US employment and the dollar rally are literally the overriding theme of the week. Scheduled economic events all traders or investors must watch include, in rough order of importance:
- NFP and Unemployment Rate. The biggest market mover of the week is the monthly The US BLS Non-Farms Payroll Change and Unemployment Rate reports, Friday 12/7 at 08:30 am EST. The below events are more or less important depending on how well they help us predict the Friday outcome. Most can be found on any decent economic calendar In rough order of importance:
- ADP Non Farm Payroll Report. Attempts to measure the same thing as the US Government report. Generally accurate in predicting the US NFP direction if not the exact magnitude of the change. The ADP figures have been weaker than the initially reported government number by 117K per month on average over the past months. Source: Any decent economic calendar from any major financial website or broker website. My personal favorite is at forexfactory.com
- The employment component of the service sector ISM. Over the past 10 years, the index has had a nearly 90% correlation with non-farm payrolls.
- The employment component of the Manufacturing sector ISM. Over the past 10 years, the index has had a very strong 87% correlation with non-farm payrolls.
- The 4 week moving average of new weekly unemployment claims.
- The direction of continuing claims as shown by the prior 2 reports. That is, did the most recent show greater or fewer continuing claims, and was the rate of increase/decrease greater or less when comparing the prior 3 reports. See the US Bureau of Labor and Statistics
- Consumer Confidence as per the Conference Board – polls 5000 families about their expectations over the next 6 months. Was already released last week, at 52.9 slightly missed the forecasted 53.0 but still showing improvement, which suggests increased consumer spending.
- U. Michigan Consumer Confidence Survey – polls 500 people about their expectations for the next 5 years. Because of this smaller sample and longer time horizon, this report is considered less accurate than the Conference Board's report. Revised data already released 12/23, at 72.5 was below both the forecasted 74 and prior 73.4.
- Monster.com Employment Index (based on the # of online job ads) rising or falling. Released on the first Thursday of the month for the prior month. Per the site: “The Monster Employment Index is a broad and comprehensive monthly analysis of U.S. online job demand conducted by Monster Worldwide, Inc. Based on a real-time review of millions of employer job opportunities culled from a large, representative selection of online career outlets, including Monster®, the Monster Employment Index presents a snapshot of employer online recruitment activity nationwide.”
- The level of strike activity. A rising figure suggests worse NFP, a falling one suggests a lower NFP. It’s been essentially zero given the weakness in the job market.
- Unscheduled Potential Surprise Events: The only news likely to compete or override the above would be something significant regarding sovereign debt repayments or credit ratings, especially in the Euro-zone. These simultaneously hit both risk sentiment and the EUR, and thus move the USD both in its role as a prime safe-haven currency AND as prime EUR counterpart. Moody’s, Standard & Poor’s, and Fitch were humiliated yet again (after missing Lehman and Bear Stearns) by the Dubai World debt announcement on Thanksgiving, and no doubt have made New Year’s Resolutions to keep far closer watch on the PIGS (Portugal, Italy/Ireland, Greece, Spain), as well as the rest of the increasingly manure filled barnyard of sovereign debt markets worldwide.
Analysis Part I: Brief Review of Ramifications
Overall data is meets or beats expectations: That would support the rising expectations for US exit from stimulus and interest rate increases. Combined with last week’s USD pullback, expect to see a resumption of the USD rally and pullback of counterpart currencies at least to a retest of recent USD highs against these. The same goes for energy and precious metals. Stocks are harder to call. Because this news would advance the growth thesis, US stocks should get some boost, and thus ditto the major Asian and European indexes, which tend to follow each other. However at some point the impending threat of a period of rising rates should put some kind of damper on equity market advances.
Overall data misses expectations: A major disappointment likely means resumption of the trends in forex and commodities we’ve seen for most of 2009 – most majors gaining vs. the USD and upward pressure on commodities as they resume their dollar hedge appeal. A minor miss would be harder to call, and market reaction would likely depend on specifics buried within the reports that determine the true meaning of the data.Analysis Part II: Past Weeks Set High Expectations for This Week
The US dollar finished marginally lower against major counterparts through an uneventful, illiquid holiday week of trade, and markets now look to the coming week’s resumption of real trading and a surge in critical economic data to determine broader direction for the US currency. A nearly-silent economic calendar gave little reason for US dollar moves through the past week, though illiquid market conditions not surprisingly fueled some unexpectedly sharp intraday moves in the US currency. Exceptions included Thursday’s positive Initial Jobless Claims result and the prior day’s impressive Chicago PMI data—setting expectations high for the coming week of critical jobs related data. Given a fairly steady string of positive economic surprises, markets may be inclined to sell the resurgent US Dollar on any disappointments. The week is heavy with employment related reports, which are central for both the Fed, and thus the markets, in adjusting expectations for stimulus exit policy and ultimately short term interest rate increases.Analysis Part III: Events
The dollar rally that began Thanksgiving was as much due to the sovereign debt downgrades (events type 1 AND 3 together) as it was to the improving jobs and spending data a month ago. This week is January’s biggest jobs data week and thus by nature a crossroads for the USD rally and by extension, most other major FX and commodity trends in the past month. For the dollar is directly or indirectly involved in the vast majority of trading in all these markets worldwide.
The Nonfarm Payrolls and Unemployment Rate reports will be the climax of a packed economic schedule and provide potential US Dollar volatility in the days ahead. Whether or not these beat expectations will set the direction for the USD, Forex, and Commodity Markets, possibly for major equity indexes as well.
The first dose of event-driven volatility will likely come on Monday’s US ISM Manufacturing data—historically one of the most market-moving events across the forex market. This past week’s Chicago PMI data came in considerably better than consensus forecasts and sets similarly lofty expectations ahead of the ISM release. It may be especially important to watch for shifts in the ISM Manufacturing employment index ahead of the later-week Nonfarm Payrolls report.
The following days will see the release of potentially significant Pending Home Sales and ADP Employment Change reports, and the rest of the data listed above. The former is likely to show that pending sales of existing homes pulled back after nine consecutive months of gains, but volatile housing data is notoriously difficult to predict. Subsequent ADP Employment change figures will ostensibly give us a better idea on what to expect for Friday’s NFP numbers and may indeed be one of the most market-moving releases of the week.
Finally, the US Nonfarm Payrolls report is expected to show that employers neither added nor shed jobs through the month of December—which would be the best result since December, 2007. US Dollar risks likely remain to the downside ahead of the data release, however; material disappointments could negate the bullish trend in US employment data. Traders will need to keep a close eye on these key reports and their effect on broader Greenback trends. We expect the US Dollar to continue to recover against the Euro through 2010, but fast shifts in Forex Futures and Options market sentiment, suddenly overbought on the USD, suggest that the short-term may produce further pullbacks. The coming week should provide a good deal of clarification and determine whether or not the USD rally has staying power.
Again, however, we must remind readers that the threat of further sovereign credit shocks is still very much with us, and the odds favor more bad news before resolution. Relevant parties will do all they can to ‘manage’ market reaction, so we may well get little advanced notice. Everything will appear fine, until suddenly it isn’t. This concern could well limit USD downside in months ahead, as traders may be reluctant to get too short the USD under these conditions
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