Dirty NFP: What Should Investors Expect?

So far, Capital Markets have dealt with a number of surprises this week, and today's non-farm payroll is anticipated to be another. North of the 49th parallel, Canada's job growth is expected to keep on ticking over. While in the US, investors are exposed to “dirty data” jobs. No matter what's reported, let's hope this morning's payrolls print gets to create more volatility in forex-land just like Draghi and company succeeded in doing yesterday. Being confined to endless tight trading ranges already this quarter has been making the life of an FX trader rather dull, and for some even difficult to make a living.

ECB policymakers surprised the market and eased monetary policy yesterday, cutting overnight lending rates by -0.25% to just above zero, a month before the fixed income curve had been pricing in any changes. From the fundamental perspective it was a logical move from Draghi and company, the surprise was in the actual price action and trading.

The EUR finally broke through its contained trading range barriers, allowing the market to witness “volume and volatility” again, a perquisite for trading 101. However, the disconcerting thing is that despite global central bank divergence, with European doves vs. the American hawks, the surprise ECB refi-rate cut and stronger US growth data has thus far failed to provide a boost to “real risk appetite.”

The EUR bears remain out in full force, but waiting for NFP has limited immediate action. S&P cut Frances sovereign rating to AA this morning, but the single currency is little affected so far. Even Germany posting a record trade surplus (€18.8b) had the EUR only edge higher. The markets reaction to such news events suggests that “short” EUR positions dominate the forex space. Since yesterdays surprise ECB cut everyone and his or her mother is recommending 1.30-1.31 as an outright year-end target for the now “interest challenged” currency.

Last February was the last time that the ECB was so blatantly dovish. The EUR is expected to become an increasingly attractive funding currency for the remainder of this year. For now, and until investors are told otherwise, the Federal Reserve will continue to try to communicate that its policy will remain loose, presumably under the guise of transparency and through tapering environment conditions. That ought to keep rates low for a considerable length of time. Under this scenario, the EUR should be capable of finding some support.

Perhaps an outlier is today's jobs report where we get to see the impact of last months US government partial shutdown. It's bound to reduce the reliability of the October jobs report-if anything it has increased the uncertainty around analysts forecasts. Everyone seems to be taking a “little off the top.” Assuming all things equal the market was probably looking for a repeat of the previous report. The shutdown has given us forecast numbers straddling the +100k mark and just above. Even the unemployment rate is expected to rise three-tenths to +7.5% because of the government shutdown.

What about the mighty dollar? From a macro perspective, while the EUR continues to find its feet, the mighty dollar cannot afford to rest on its laurels. Even the stronger ISM and GDP readings are probably not enough to keep the USD generally supported. In the absence of new signs of strength, the latest USD's surge could be expected to lose some momentum, especially with a soft payroll number – this will hurt the weaker EUR shorts initially. If there is a soft payroll headline the market will be expecting to see some near-term retracement in the USD trend.

The Canadian jobs report will not be as contentious as its southern neighbors. Market consensus is looking for an increase of +15k to the headline print while the unemployment rate is to push a tad higher to +7% from +6.9%. Ever since Governor Poloz backed away from the BoC's somewhat hawkish stance, the market has remained fundamentally bearish on the “loonie.” However, the CAD could possibly benefit near term from the improvement in US data, causing it to outperform most of its G10 trading partners while underperforming outright against the dollar. The predominant trade strategy, using the above scenario, prefers to buy USD/CAD on dips.

Other Links:
Market Flatfooted By Draghi's Slight-Of-Hand But For How Long?

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