Non-Farm Payrolls could place further pressure on risk currencies
This year has started with a vengeance with plunging equity and commodity markets, ratcheting tensions in the Middle East, North Korea claiming to have exploded a hydrogen bomb and with CNY under pressure.
This Friday’s Non-Farm Payrolls will be another test for the markets with the number expected to be above 200,000. If so it will trigger speculation that the next rate hike from the US Federal Reserve could come as early as March.
This could see USD make further gains as well as JPY, which will play out its safe haven status.
The Fed is guiding around four rate hikes for this year, double market expectations. The Fed minutes also reveal that there could be a degree of disunity among the Fed’s rate setters with particular concern over potentially weak inflation dynamics.
On the one hand US wage growth appears to be picking up, it’s running at just over 2% with the unemployment rate at a tight 5%, but offsetting that are commodity prices, which remain under pressure with many emerging markets suffering growth slowdowns.
Meanwhile, the yield curve on US Treasuries has started to flatten – a sign that this market believes the US could be heading for a slowdown in economic growth. Over the coming months jobs numbers may trigger speculation over rate hikes due to their strength. But overall US economic fundamentals may start to look rather more sluggish as the year wears on and eventually that will be reflected in the unemployment numbers, which in turn will influence the Fed.
On the hand, the US might be in more robust shape than many commentators are giving it credit for. In the coming months, its real robustness in the face of tightening monetary policy will become clearer.
With so much global uncertainty and tension, spasms of fear are likely to continue rippling through global currency markets for much of this year, only to be occasionally punctuated by violent short covering rallies on heavily sold ‘risk’ currencies.
Meanwhile, CNY remains under pressure with the People’s Bank of China setting the mid-rate versus USD at 6.5646, its lowest since March 2011. The worry is that this reflects weakness in the Chinese economy. Indeed, further CNY weakness is likely and as noted on this blog before, China has been whittling away its reserves defending the currency, which will not go on indefinitely. In fact, this is likely to be a more potent dynamic behind the devaluation rather than a move to deliberately make Chinese exports more competitive. But to China’s neighbours it will still feel like a currency war.
However, it’s not all doom and gloom. Improvements in sentiment and a slight fall in unemployment has been seen in the Eurozone, but given the market’s mood this is to get much attention.
TECHNICAL ANALYSIS: EUR/JPY – Could NFP provide shock & awe?
January has started badly for EUR very much mirroring equity markets as it has fallen sharply against USD. A similar dynamic is playing out on EUR/JPY, which at the moment looks like a risk currency versus a safe haven and in the current environment, JPY is coming out firmly on top.
A strong NFP number on Friday, which prompts US rate rise speculation could see traders dumping risk currencies in droves to buy USD and JPY.
However, the technicals on EUR/JPY all look stretched on the daily chart. The 14-day RSI is digging into oversold territory and the lower Bollinger band is being stretched, suggesting a reversion to mean or at least a temporary retracement can’t be too far off.
Key support levels for the pair are placed at 126.95,126.78 with 126.09 being a particularly key level, which could see historic lows all the way down to 122 tested if the markets really becomes downbeat over the next few weeks.
However, Friday’s NFP number could yet turn out to be weaker than expected, and they do defy expectations from time to time. If so the move on EUR/JPY could be considerable as it would surprise market participants. This would certainly deflate USD, at least in the short-term, probably give risk assets some relief, which in turn would weaken JPY.
Under those circumstances, resistance levels of 127.95, 128.25,129.37 130.05 and even 131.06 could be in the cross hairs.
By Justin Pugsley, Markets Analyst MahiFX