Dollar looks to stabilise ahead of Non-farm Payrolls

Market Overview

After several days of dollar correction, the bulls are starting to build support again which is starting to unwind some of the recent safe haven flows ahead of Non-Farm Payrolls. The need to re-price for a Trump victory has sent market fear soaring in recent days with the VIX volatility closing yesterday at its highest level (at 22) since Brexit. However, whilst equity markets are feeling the concern, it is interesting to see Treasury yields begin to pick up slightly again and the US Trade Weighted Dollar also moving higher. This is helping the dollar to perform better across the forex majors and begin to unwind some of the safe haven flows away from the yen and gold. Today is Non-farm Payrolls and with the Fed still firmly on course for a rate hike in December it would need a drastically disappointing set of labor market data to alter market expectations. With expectation of another middle of the road report and the market more mindful of the impending election, it is possible that this could be one of the lower volatility Non-farm Payrolls Fridays we have seen for a while.

Nonfarm Payrolls

With the market’s “fear” gauge elevated, Wall Street continues to decline and has now posted eight consecutive lower closes on the S&P 500 (-0.4% to 2089). Asian markets have been lower overnight again, whilst European markets are also weaker in early moves. Forex markets are showing a degree of stability for the dollar today which may simply be a reflection of preparation for today’s Non-farm Payrolls. Gold and silver are dropping away slightly and oil has at least stopped falling for the time being.

Traders will be on the lookout for the US Employment Situation report today at 1230GMT. The headline Non-farm Payrolls are expected to show 175,000 jobs were created in October (up from 156,000). The unemployment rate is expected to improve to 4.9% (from 5.0) and if this comes with another improvement in the Participation Rate (from 62.9 last month) then this would be an indicator of strength. The other main factor to watch is the average hourly earnings growth which is expected to be +0.3% for the month. Prior to the payrolls report, this morning the Eurozone announces services PMIs and composite PMIs, which are expected to see the final Services PMI improve to 53.5 (which would be in line with the flash reading and up from 52.2 last month) and Composite PMIs improve to 53.7 (from 52.6 last month).

 

Chart of the Day – GBP/AUD

Could sterling now be on a sustainable recovery path? The rebound has been driven by a mild hawkish shift in Bank of England policy stance and the Article 50 court case, however there has been a near term rounding bottom completed on Sterling/Aussie. It is interesting to see that is has not just been a one day spike higher, as the market has been consolidating for the past couple of weeks and momentum indicators have already turned positive once more. The improvement comes with the Stochastics and RSI rising strongly, and the MACD lines having crossed higher. The price breakout above 1.6115 completed a small near term base that implies 1.6440. In the medium term this is little more than a blip to the upside, but with the bulls behind the recovery the move could become much greater. The resistance does not really start to come in until the August low at 1.6715 as there is little real resistance that was left during the September/October sell-off. The hourly chat shows a choppy session yesterday but there is now a band of support 1.6115/1.6145 to use as a chance to buy, with initial support at 1.6165. Yesterday’s high at 1.6285 is initial resistance today.

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EUR/USD

With the prospect of Non-farm Payrolls today and an apparent stabilising in the US Presidential election polls, the rally on the euro has begun to stutter. A very neutral looking candle has just created a sense of consolidation now. For the second session in a row the pivot level at $1.1100 has prevented the continuation of the rally, with another attempted intraday move through being thwarted. This long term 50 pip pivot band which I have talked extensively about over the months again seems to be playing a role. The last two sessions have both had lows around $1.1050 and closed close to $1.1100. Today’s trading continues around the $1.1100 level as the resistance builds at $1.1125. Momentum indicators are just also taking a breather with the Stochastics strongly configured but rolling over and the RSI interestingly rolling over just under 60 (in a similar way to how it did in September). The hourly chart reflects the loss of impetus in the rally and more of a ranging market is building now. Above $1.1125 opens the medium term downtrend which is around $1.1185 today. Unless the payrolls data is drastically surprising today I expect volatility to remain fairly limited with little real direction. Focus remains on the election.

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GBP/USD

The market finally broken out from the range between $1.2080/$1.2230 yesterday. Having threatened both ways, finally we have a recovery and the implied move is $1.2580. Yesterday’s strong bull candle came on the back of the Article 50 court ruling which could now have changed the outlook at least for the near term. The uncertainty created has led to short positions on sterling being closed and a rebound which has now broken a downtrend that dates back to the original Brexit sell-off. The market is testing initial resistance at $1.2480 that was posted in the wake of the “flash crash” a few weeks ago, but there is little resistance until $1.2600 and more realistically $1.2800. The daily momentum indicators are strengthening again and the bulls are gaining confidence. The issue is that this is politics that will drive the chart in the coming days/weeks. Aside from Non-farm Payrolls volatility today, the US election will be of key importance, and is something that could easily change the direction again (lower on a Clinton victory). Initial resistance is at $1.2495 and support at $1.2415, however this promises to be a choppy ride in the coming sessions. The breakout support at $1.2330 is now key.

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USD/JPY

The “fear” trade that benefits the yen is just beginning to subside slightly as the momentum behind the Trump comeback in the polls begins to settle. With the dollar just beginning to claw back some lost ground, the air has found support at 102.55 and started to build again overnight. The failure to close below 102.80 could be seen as important but also the resistance in place at 103.50. The hourly chart shows the market is testing the near term band of resistance 103.00/103.50 and a recovery back above 103.50 would complete a near term base pattern which would imply around 95 pips of further recovery. The hourly momentum is already signalling an improvement and is looking to leave a higher low of support (interestingly at 102.80 which is an old pivot level). Dollar/Yen will tend to be a volatile play on the payrolls report and this could still be the case today even though it is likely to be a somewhat subdued reaction (due to the focus being more on the election).

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Gold

A fourth positive candle in the past five has resulted in a close above $1300. However, there is a key medium term band of resistance $1300/$1310 and I started to see the bulls struggling yesterday, so it is interesting to see this again being the case overnight. The session yesterday posted a lower high and a lower low compared to Wednesday and the momentum indicators are just beginning to threaten to roll over again. The RSI has tended to run out of steam around 60 in the past few months and this could again be the case. The hourly chart also reflects this loss of impetus with a broken five day uptrend and deteriorating momentum signals. Yesterday’s low at $1285 is now a key support for the market and a breach would open a deeper correction back towards $1270. The bulls need to break this barrier which has resulted in the posting of highs at $1304.30, $1306.40 and $1307.80 on consecutive days. Payrolls are likely to drive some volatility but it will still be the election that is the key impact of the near to medium term outlook.

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WTI Oil

The selling pressure continues on WTI. The market has now posted lower daily highs on each of the 11 sessions since topping out at $51.93. The continued decline in the daily close is also reflecting the ongoing deterioration in the momentum indicators with the RSI now in the mid-30s and Stochastics bearishly configured. Having broken the primary uptrend and having traded for the whole session clearly below the 144 day moving average (@ $46.39) for the first time since April, the bears are really holding control now. A test of the $44.20 late September low is next in line which would be a complete retracement of the move since the OPEC production cut agreement. However the deterioration in the techncials and the downside potential suggests that there is the increasing prospect of a test of the key September low at $42.55. Initial resistance today is around $45.00 as the intraday rallies continuing to be sold into. $45.90 has been limiting moves in the last couple of days, whilst the main near term resistance remains the pivot at $46.50.

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