DailyFX
Forex: Dollar Traders Ready for Heavy Swings as NFPs Shape Taper Fears
John Kicklighter

Talking Points:

  • Dollar Traders Ready for Heavy Swings as NFPs Shape Taper Fears

  • Japanese Yen Crosses the High Water Mark for NFPs, Taper, Risk Trends

  • Euro Drops after ECB’s Draghi Keeps Rate Cut Option

Dollar Traders Ready for Heavy Swings as NFPs Shape Taper Fears

We are making the final pass before the Federal Reserve decides in less than two weeks whether to Taper or not. A reduction in support for the markets seems the consensus, but some markets – the most exposed and leveraged – have attempted to hold back the tide. That resistance could very well collapse should the upcoming August employment figures finally undermine the complacency and expose blatant risks. And so, with the upcoming nonfarm payrolls (NFPs), traders must take close stock of whether the market is tipping into the extremes of sentiment. To gauge there are many assets that can act as barometers but few as effectively as the USDollar and S&P 500.

As a simple gauge of how influential the US labor data has become, we only need to look back at the August 2nd release of the July NFP figures. While US equities were relatively restrained for volatility that day, it would call the top and instigated the month-long bear leg the asset class currently finds itself in. Why the tide change without the immediate volatility impact? Speculators often follow the payrolls release which missed the forecast. Yet, the aspect that mattered to Fed policy was the sharper-than-expected drop in the jobless rate. That same dynamic exists with this event, but the loud countdown to the FOMC rate decision and the erosion in other yield-sensitive assets in the past weeks will only intensify the reaction.

The Bloomberg economist consensus heading into the data release is for an 180,000 net increase in payrolls and a hold in the jobless rate at 7.4 percent. A larger jump in the number of new jobs and/or a downtick in the percentage of Americans in the labor force without jobs would be considered further support for a reduction of QE3 this month. The combination of both would be the most influential and thereby offer the clearest signal the greatest portion of the market – thereby encouraging a broader deleveraging of risky exposure. For the antithesis outcome of weaker data, the reaction is unlikely to be as encouraging for bullish risk interests. It would take a severe curb on the data to put off Taper speculation. Yet, under that scenario; while equities may not charge aggressively higher, the dollar could suffer. The grey area is where we likely end though. It is important to remember that status quo is a path towards easing support that has encouraged profligacy.

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