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Dollar and S&P 500 Have a Stake in September NFPs
John Kicklighter

DailyFX.com -

Talking Points:

  • Dollar and S&P 500 Have a Stake in September NFPs

  • Euro Traders Receive Little Relief from ECB

  • Yen Crosses Look to Nikkei 225, S&P 500 for Guidance

Dollar and S&P 500 Have a Stake in September NFPs

The US Dollar slipped for a second consecutive day this past session as capital markets stabilized and traders prepared for Friday’s NFPs. We haven’t seen a three-day Dow Jones FXCM Dollar (ticker = USDollar) decline since July 9 – the last stage of congestion before the currency began its current, three-month climb. Yet, if there were a specific piece of event risk that could be expected to knock the air out of such a robust move, it would be the labor data suite. While a recent slide in speculative confidence these past few weeks has contributed to the greenback’s buoyancy, its primary motivator has been interest rate speculation. Though the Federal Reserve’s first rate hike is not likely due until the second half of 2015, the steady march towards tightening draws marked contrast to its major counterparts (ECB, BoJ, PBoC). Yet how much progress does a distant tightening policy afford? What if that time frame is pushed back?

Considering the four-year high the Dollar is currently entertaining, the bar is set very high for rate expectations and its premium has ballooned. In other words, the risk of volatility is greater for the currency should this data disappoint and deflate rate hopes. Much of the initial volatility will be prompted by the release of the NFPs themselves (consensus of a 215,000 – net increase), but it is the ‘qualitative’ figures that the Fed is following for policy guidance. That means the unemployment rate (forecast 6.1 percent), participation rate (62.8 percent) and earnings growth (2.2 percent) may ultimately command trend. That said, while we watch the Dollar’s direct reaction to the data run, don’t forget the currency’s other function as safe haven. If a weak data print finally causes a US equity collapse, the greenback will find a bid.

Euro Traders Receive Little Relief from ECB

Following in the footsteps of the Federal Reserve and Bank of Japan, the European Central Bank stepped up to the stimulus plate. But, rather than mimic its contemporaries by announcing a large and transparent program; the ECB opted for ambiguity. Technically, the President Mario Draghi announced the group’s intention to adopt an asset purchase program at the September 4 meeting. However, the particulars were put off until after this month’s meeting. Details constituted a confirmation that the bank will begin buying covered bonds and asset-backed securities later this month. Beyond that, there was no clear mention as to the ultimate size of the effort beyond suggesting they may fall short of the previously stated goal to drive the balance sheet back up to early 2012 levels. The Euro was perplexed, but capital markets did not take it well.

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