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DailyFX
Dollar and S&P 500 Poised for NFP-Driven Volatility
John Kicklighter

Talking Points:

  • Dollar and S&P 500 Poised for NFP-Driven Volatility

  • Euro Slides Despite ECB Hold on Rates, Stimulus

  • Japanese Yen Pairs Rally Over-Extended Ahead of BoJ

Dollar and S&P 500 Poised for NFP-Driven Volatility

It doesn’t take more than a glance at the charts to see there is serious tension in the markets. On the one hand, the Dow Jones FXCM Dollar Index (ticker = USDollar) is at the top of a two-month range. On the other, the S&P 500’s arc to record high has tapered off steadily from its aggressive drive through the opening two days of the week. For the traditional risk-reward scale, that means we have both the FX market’s preferred safe haven at the top of its recent trading band while the banner man for broader capital market’s speculative stands at a record high. While the greenback has slackened its tether to risk trends, this positioning nevertheless reflects an overextended market. And, all that is needed to trigger a sharp rebalancing is the proper catalyst. Can the NFPs be that spark?

Nowadays, the monthly US labor data is more of a media event than a trader affair. Between a consensus US growth forecast that put it at the head of the developed world curve and the Federal Reserve’s decree that Tapering will continue barring a ‘significant’ change in underlying conditions, the outlook seems steady for the currency. Yet, when we couple speculative bearing with the distinct ‘good or bad’ assessments that are made on this data, there is clear potential. The most potent scenario here would be one where risk aversion is set off. Given the lack of conviction and extreme levels of exposure, capitulation could set send equities and yen crosses careening.

The ideal catalyst for a dollar-favorable move would be a downtick in unemployment (it’s expected to ease to 6.6 percent) and/or material enough beat for NFPs (consensus is 200,000) to spur expectations of a forward shift in rate forecasts. The problem is, that would be difficult to accomplish. Alternatively, a substantive miss could shake growth convictions in the capital markets, but it could also complicate the dollar’s participation as weakened labor conditions could – if not threaten the steady Taper – push back the Fed’s first hike. In an alternative view for risk appetite, a strong reading could also reinforce equity highs – though the greenback response to this is unlikely to be one-for-one.

See more on John's scenarios and strategy for the upcoming NFPs in Today's Strategy Video

Euro Slides Despite ECB Hold on Rates, Stimulus

As the majority of market participants and economists had predicted, the European Central Bank (ECB) held its hand on monetary policy this past session. Both groups were attributing more than a 95 percent probability that the policy authority would decide for the fifth consecutive meeting to hold its benchmark lending rate at 0.25 percent and avoid adopting any new unorthodox measures. They were right. And yet, the euro still fell. Meeting the status quo on this month’s efforts would mean shift the focus forward and assessing whether further accommodation would be adopted at future meetings. In ECB President Draghi’s press conference, there was a notable increase in the dovish rhetoric. Though there is still ambiguity to it, the central banker suggested they were ready to move if inflation remained too low for too long. Moreover, they were “unanimous” in favoring unconventional methods and even discussed QE.

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