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US Dollar Weekly Outlook: Jobs Data This Week The Likely Key Driver of the USD, and FX Markets



The US Dollar is involved in about 90% of all forex and commodity trade, and indirectly central to stocks as well. Here are the key points to know for the coming week.

Summary

US Dollar Outlook: Bullish

-    Events: SUN-WEF Annual Meetings, MON- Core PCE Price index m/m, Personal Spending m/m, ISM Manufacturing PMI, TUES- Pending Home Sales m/m, WED- Challenger Job Cuts y/y, ADP Non-Farm Employment Change, ISM Non-Manufacturing PMI, FOMC Member Warsh Speaks, Unemployment Claims, Prelim Nonfarm Productivity , Unit Labor Costs q/q, Factory Orders m/m, FRI- Non-Farm Employment Change Unemployment Rate

-    Risk aversion grows on continued concerns about China tightening, EU debt worries, risk asset valuations

Fear appears deeper this time- unlike past earnings seasons, markets fail to rise even on good news of solid US corporate earnings, which instead of buying bring profit taking, IMF upgraded global growth forecast also fails to encourage markets, markets shrug off seemingly strong US GDP results as mostly inventory rebuild on recovery gamble, PCE (personal consumption expenditure) growth mostly from unsustainable government handouts

-    Safe-Haven Japanese Yen, US Dollar soar on financial risk aversion

-    However Swiss Franc falls as SNB attempts to keep Franc from rising vs. Euro

-    EUR/USD down 8% since December dollar rally began with Dubai World Default risk.

-    Worsening technical, fundamental indicators, January effect in the S&P 500, suggest further US Dollar gains in 2010 as it places well among the “least ugly” among major currencies

Analysis

As we’ve reminded readers for months, the US Dollar is driven by four basic event types- we saw news in three of them:

  1. General Fear Events: We got those from concerns about China growth, risk asset valuations relative to growth prospects as global equities failed to respond to solid US earnings, GDP results, and IMF global growth forecast upgrades, as these led to profit taking rather than buying.

 

  1. Fear Events That Undermine the Euro:  There were ongoing EU sovereign debt concerns, as neither Greece nor any of the other PIIGS showed signs of making real headway in resolving their creditworthiness. Japan’s downgrade by Standard and Poor’s to negative watch did not help sooth markets.

 

  1. Improving US Fundamentals: It looked like the big US GDP figure, beating estimates so well, did that, at least at first glance, though markets correctly saw that most of this was from buildup of depleted inventories and government subsidized personal consumption expenditures (PCE). Unless there is real demand for the new inventory and PCE can sustain itself, these could come back to haunt the US as excess inventory sapping profits and relapsing consumer spending while the US government is left with no long lasting growth except in its  own debt levels.

 

Losses of 5% in the US S&P 500 and broad deterioration in financial market risk sentiment boosted the safe havens like the US dollar. A positive surprise in highly-anticipated US Q4 GDP results likewise improved expectations for QE withdrawal and rate rises for the US Dollar, giving it a rare rise on fundamentals improvement in addition to its safe-haven appeal. The US Dollar now boasts three consecutive weeks of significant appreciation vs. the Euro. Given previous bearish extremes in US Dollar sentiment and positioning, we have argued for months that the dollar could stage a major comeback through the new year, especially given the dubious fundamentals justifying the March rally in risk assets. Already we see that both the EUR/USD and S&P 500 have posted significant declines on the month, and the January Effect in stocks and currencies points to further Greenback appreciation into February and beyond.

Technical indicators also point to more gains vs. the Euro.  The EUR/USD alone comprise about 33% of all Forex trade, thus these currencies push each other in opposite directions like children on a seesaw.

 

EUR/USD DAILY AVAFX CHART  10 JAN 29

As the above chart shows, the pair crashed through virtually every major support level established since June, be it price or Fibonacci level, major moving averages or trend lines.  In addition, the 50 day Simple Moving Average is about to cross below its declining 200 day SMA, creating an ominous “death cross” that suggests the downtrend is not to be short lived. A move to 1.3800, which would complete a full retracement of the EUR/USD’s rise since June, appears to be coming.

However, further gains for the dollar will likely demand more fear or more improvement in the US economy, as unwinding dollar shorts become less of a factor. Based upon the latest CFTC data on forex positioning in the futures markets, traders have increased their short EUR/USD  positions to the highest level since September 2008. The prior week, short Yen positions were at the highest level since 2008 but the recent decline in USD/JPY has flushed out many of the short Yen and long dollar traders.

Key Events To Watch

As noted above, this first week of February is packed with economic event risk, climaxing in the critical US NFP and Unemployment report. Jobs and spending are the prime metrics by which the Fed will decide to tighten economic policy and boost the dollar, and these reports are as important in that regard as they come.  Forex options markets have priced in considerable price moves in the days ahead. The critical question is how the dollar and risk appetite will respond to the results.

See the above section on key events for the coming week for a full listing of leading indicator data for gauging the likely results of Friday’s NFP and Unemployment report.

These are notoriously difficult to predict, very volatile, and prone to major revisions. Yet traders respond to the data at hand, and any significant surprises in earlier ADP Employment and ISM Services Employment Index figures could easily move markets by themselves, in addition to surprises in the market-moving Nonfarm Payrolls numbers.

Shorter-term traders should keep a close eye on the S&P 500 chart as the best overall picture of risk appetite, and on the EUR/USD and dollar index charts as the best single gauges of US Dollar  sentiment.  Also watch other risk barometers surrounding major news events out of the US and other large economies. We remain bullish the US Dollar on the Euro’s break below 1.40, but as we continue to note, once the EUR/USD stops climbing down its lower Bollinger band and pulls away from it, the pair tend to stage a reaction bound to test resistance levels. That’s been tried repeatedly this week in early trading, only to see the move fade towards the close in New York.

In sum, we still believe that risk assets could get come kind of reaction bounce in the near term. However, the signs remain for growth to be unsteady at best, and economic relapse into the feared “W” shaped recovery is a real threat, particularly with so many sovereign credit down grade threats in Europe, Japan, the UK, and really, the US too.  Until there are more signs of self sustaining growth (vs. growth from unsustainable government spending or inventory rebuild) the US dollar rally could continue on risk aversion alone.

DISCLOSURE: NO POSITIONS