Forex Trading Analysis – Non Farm Payrolls Preview

What We Are Watching

•      Non Farm Payrolls
•      Dollar/US Equity Correlation
•      Gold/Dollar Correlation

It’s that time of the month again for Forex traders as Non Farm Payrolls figures will be released later today.  The figure comes after yesterday’s ADP Employment Change figures blew away expectations and triggered a day long rally in the dollar.  The greenback was higher across the board, even scoring nice gains against the Yen as the USDJPY has hit a high of 77.22 this morning; 65 pips above yesterday’s lows.  Even more important was the dollar’s ability to gain as US Equities rallied in afternoon trading and erased initial morning weakness.  The correlation revealed that the dollar’s strength may not have to be sacrificed in the wake of US based risk rallies and could be showing that Forex traders are more willing to dump the Yen and Euro to fund their speculative equity moves.

Non Farm Payrolls Preview

Expectations are for payrolls to increase 150,000 for December and the Unemployment rate to rise to 8.7% from last month’s surprise drop to 8.6%.  So far this week, employment data has been on the upside with ADP and Initial Claims data beating expectations, while ISM PMI figures showed increases in the employment component of the Index.  As such, Forex traders may be anticipating a continuation of upside gains in the Non Farms Payrolls today. However, with all the optimism, the markets could be set for a fall, as previous Non Farm Payrolls results have failed to beat expectations, with only the Unemployment Rate showing sharp gains.  Therefore, the question has become what is really correct, the private sector surveys, Unemployment Rate, or the Government Payrolls figure?

Regardless of answer, with the current built in expectations we may need to see the headline Payroll figure beat to the upside to keep the current positive dollar sentiment going.  As such, if figures miss expectations, Gold could be a big winner today as it has been gaining momentum so far in 2012 on the heels of EU worries (more on Gold).  On the other hand, a strong Non Farm Payrolls figure coupled with the Unemployment Rate hold steady should keep dollar buying going, with the USDJPY being a prime candidate to trade higher throughout the day.

Forex Week Ahead – Window Dressing, China, and Japan

Coming up this week

• Tuesday – US Consumer Confidence
• Wednesday – Swiss KOF Economic Barometer
• Thursday – US Initial Claims
• Thursday – US Pending Homes Sales
• Friday – UK Nationwide HPI

Forex trading is back on today after a long weekend for the holidays.  However, we aren’t expecting much volume as many Forex traders have closed up shop for the year and aren’t returning until next week. Nonetheless, as last week’s moves showed, even with the lack of participants we could see some huge swings in the Forex markets.  This is especially true as we are in the midst of window dressing season as portfolio managers make quick changes to their overall portfolios to improve the look of their holdings.  In such scenarios, traders often trim their positions in losers while loading up the year’s winners. As such, the EURUSD could be under pressure this week as Forex traders work out of positions. 

Our opinion this week is to take advantage of any EURUSD weakness and buy below 1.2950 with stops at 1.2850.  The rationale being that we could get a bounce once the new year starts and short term sellers quickly cover their positions.

China and Japan Currency Pact

Elsewhere, the big news from the weekend has been an agreement between China and Japan to allow direct exchange of their currencies.  Until now, Forex traders of the two nations have had to swap their currencies first into dollars and then exchange to the target currency.  The agreement will lower costs of Forex transactions between the two countries. Looking ahead, the question is what type of effect the pact will have on currency prices.  On the surface, the loser is the dollar, as Chinese companies receive an easy alternative to dollar deposits.  The net affect could grow if China becomes a big buyer of Japanese debt as a result.  Other than the main players, the really big winners could be other Asian rim currencies.  Currently, there has been talk of expanding the China/Japan agreement to include Indonesia, South Korea, and Thailand.  If those countries, or other are included, it could trigger a rush of investment money from China towards the rest of the Asian Pacific Rim and strengthen their currencies.

In current trading, the Yen is trading slightly higher as the USDJPY is back below 78.00.  However, the real importance is what long term affects will China’s increased involvement in the region’s currencies have.

Forex Trading Analysis – EURUSD Dumped Again

The Euro was lower yesterday as a report from the ECB that showed an increase in EU banks needing additional funding renewed worries to the currency.  Yesterday we noted our lack of excitement for Tuesday’s EURUSD rally; therefore it wasn’t surprising to see the Euro fall on the slightest sign of worry. Beyond the Euro, the overall fall in equities yesterday triggered a return to risk selling and led the dollar to regain some of Tuesday’s losses.

The ECB report showed the region’s banks had taken nearly 500 billion in three year loans from the central bank. Even with the liquidity boost, traders were still worries that EU banks would fail to have adequate cash on their balance sheets to cover their needs for next year.  Also, of importance is the method to the ECB is using to inject liquidity.  Rather than initiate a full fledged quantitative easing program where the ECB goes to the market to purchase European assets to hold prices of bank holdings steady, the central bank has gone straight to the banks with its cash.  Even though either method is theoretically considered monetary easing, the alck of calling it quantitative easing appears to be confusing Forex market participants.

Looking ahead, Initial Claims figure are out later today.  Last week’s much better than expected figures were partially responsible for a relief risk rally last Thursday. Unlike last week when Forex traders reacted to gains from equities before rallying riskier currencies, we could see a move straight away into names such as the AUD and GBP if Initial Claims figures again look strong.

EURUSD  

After trading just shy of 1.3200 yesterday, the EURUSD made a complete u-turn and dropped 175 pips to a low of 1.3023.  The drop reflects anxiety towards the EURUSD and revealed that Forex traders remain ready to sell first and ask questions later with the currency.  Looking ahead, the EURUSD did manage to find support yesterday at 1.3020.  As such, Forex traders will be watching this level for signs of demand in the EURUSD.  A fall below 1.3020 could trigger renewed selling and lead a move to 1.2950.

Intraday Support/Resistance  1.3020/1.3080

GBPUSD

The GBPUSD hit a high of 1.5781 yesterday before succumbing to the overall selling pressure in the market.  Nonetheless, the pair continued to find support at 1.5640.  In addition, although the GBPUSD was lower, the EURGBP traded to a low of 0.8315 which showed that Forex traders continue to rotate funds from the Euro to the Pound. As such, the GBPUSD could be a solid buy on the dip candidate on any move below 1.5660 today. Also, any moves above 1.5705 resistance could trigger another rally towards yesterday’s highs.

Intraday Support/Resistance  1.5640/1.5705

Random Thoughts - Not Excited by the EURUSD's Gains

Tuesday was a huge day for risk buying as US equities indexes gained around 3.0% while their European counterparts enjoyed a similar move higher and continue to gain on Wednesday.  In Forex land, the Pound and Australian Dollar had great gains against the US Dollar.  Following along for the ride, was the EURUSD which hit a high of 1.3132 on Tuesday, to rally 1.0% from its lows.  Nonetheless, the Euro’s gains left little to be excited about; here’s why.

•     EURGBP – Traded to a low of 0.8340, an eleven month low
•     EURAUD – Currently below 1.2900, an ALL TIME LOW
•     EURCHF – Hit a low of 1.2155 yesterday and is down over 200 pips from last week’s SNB rate meeting where the central bank decided to leave their EURCHF target at 1.2000, rather than raising it.
•     Gold denominated in Euros – At 1240 from 1225 yesterday morning
•     EU News – Pretty much every headline about Tuesday’s rally and the subsequent gains today has mentioned positive news from the EU as the cause of risk buying.  Specifically Tuesday’s German Ifo report and demand for Spanish debt.

So there we have it, an overall global rally triggered by encouraging EU news, and the Euro underperforms every asset except for the Dollar and Yen.  More surprising is that the Euro has been such a weak performer, and generally we will see the weakest assets receiving the largest gains during an overall bargain hunting or “dead cat bounce” move (see bank stocks which outperformed the market on Tuesday).

As such, this should be very alarming to Euro buyers since the current trading action indicates that the currency is vulnerable to overall depreciation in both risk selling and buying markets.  This is revealing that money continues to rotate out of the Euro, the only difference is where it is moving to.

That being said, our favorite long term pick continues to be shorting the EURGBP.  Unlike the EU which is seeing the ECB take as passive role as possible during the debt crisis, the UK has received assistance from BoE easing after the implementation of its government budget cuts. These moves have raised the Pound in the eyes of Forex traders and triggered a steady flow of cash to migrate towards the UK.

Forex Trading Analysis – GBPUSD Rallies

What We Are Watching

•     UK MPC Minutes
•     US Existing Homes Sales
•     Rotation into the AUD

Traders bid up riskier securities along all asset classes yesterday.  Within the Forex sector, the AUD and GBP were especially big movers, as the EURGBP traded to 0.8350, and eleven month low, while the AUDUSD has rallied 300 pips from its lows of the week to 1.0190. The rally was pinned on a better than expected German Ifo report yesterday as well as strong demand for a Spanish debt offering.  Nonetheless, even though the positive news stemmed from Europe, the Euro itself only managed to gain against the JPY and USD, and trailed against other major currencies.  As such, yesterday’s move could have been more of a result of Forex traders taking advantage of low volumes. 

We mentioned yesterday, that the end of the year low volumes could either cause less than normal volatility, or large price swings as fewer dollars would be needed to move the market.  The latter seems to have been in play yesterday. However, we will admit that we were surprised by the force of yesterday’s action. The day long momentum was more than just a “dead cat bounce,” and revealed that Forex traders are more than willing to return to risk buying on even the slightest opportunity of optimism.

EURUSD  

Along with the rest of the market, the EURUSD rallied yesterday and continues to hold strong this morning.  At a current 1.3120, the pair has gained 140 pips from late Monday’s low.  More importantly, on the way higher, the EURUSD found demand at the 1.3050 level, which showed Forex traders were willing to step up and support the pair on any weakness.  Today, eyes will be on the 1.3100 figure, and whether demand will rise to support that level as well. Also, Forex traders will be watching yesterday and this morning’s high of 1.3135, as the EURUSD found resistance at those levels and could breakout further if it trades above that figure.

Intraday Support/Resistance  1.3050/1.3135

GBPUSD

After trading above initial resistance of 1.5550, the GBPUSD went into overdrive yesterday, and didn’t slow down until it hit 1.5640.  The pair is currently trading at 1.5715, above yesterday’s highs, after setting solid support at 1.5650.  Beyond its moves against the dollar, the Pound continues to gain against the Euro, as the EURGBP hit a low of 0.8340. Looking ahead, economic news figures to play into today’s action. The Bank of England is releasing their MPC Minutes later today.  As such, mention of a weak outlook could trigger the tap of funds that has been rotating from the Euro to the Pound to stop or at least slow down. Such a scenario could lead the Pound to underperform against major currencies for the remainder of the week.

Intraday Support/Resistance  1.5650/1.5735