The dollar has come under pressure in the first week of 2017 as downside pressure on Treasury yields and measures to curb yuan weakness in China have driven some profit taking on some of the recent gains. This dollar weakness has been seen across the forex majors and on commodity prices too. There has been an interesting breakdown in the 2s/10s spread on US Treasury yields which is back below 120 basis points for the first time in almost two months, a move that has added corrective pressure on the dollar. However the early morning moves have been positive for the dollar as it is clawing back losses with traders looking to position ahead of Non-farm Payrolls. Traditionally in front of Non-farm Payrolls, markets will begin to consolidate, so the early dollar gains today could be an element of that. However, after the ADP employment change came with a slightly negative surprise and it will be interesting to see if this is a sign of a weaker payrolls report, which would see the dollar coming under further pressure.
Wall Street closed lower with the S&P 500 off by 0.1% at 2269, whilst Asian markets were also mixed to lower and the consolidation in the European markets that has been a feature of early trading in 2017 is continuing early today. In forex markets the dollar has had a modest rebound against most of the majors, although the rally against the yen is more pronounced. Gold and silver are lower with the dollar strength and are unwinding some of yesterday’s gains. The oil price is mildly weaker by around -0.2% today.
The US Employment Situation report (released at 1330GMT) will dominate traders’ focus for the day. The headline Non-farm Payrolls are expected to stay at last month’s reading of 178,000, however if the ADP Employment change yesterday is anything to go by then a small miss could be anticipated. The other factors in the report will also be watched with unemployment expected to tick mildly higher to 4.7% (from 4.6%), whilst average hourly earnings are expected to grow by +0.3% for the month which would be a welcome improvement following last month’s -0.1% decline, whilst also helping to pull the year on year back up towards +2.7%. Traders will also be watching the laborforce participation rate which has fallen for the past two months to 62.7, whilst the U6 unemployment at 9.3% last month still seems to have some slack to get back to the levels averaging through 2006/2007 where it was around 8.3%.
Chart of the Day – EUR/JPY
A breakdown on EUR/JPY would certainly be a concern for the market bulls as the yen weakness over the past couple of months has been a feature of the improvement in risk appetite. However the negative candles are stacking up now and this is weighing on the momentum indicators. The RSI yesterday pulled back to a two month low which suggests that pressure is mounting on the support. The long term breakout above 122.00 was a key bull move, but the market has since been consolidating sideways for the past four weeks and the support is coming under pressure. If the momentum indicators continue to deteriorate, the support at 122.00 will come under pressure and then the late December support at 121.55 would be on the radar. A breach of 121.55 would complete a small top pattern and imply 250 pips of correction. This would seem to be a near term correction but a breach of support at 120.85 would open support back at 118.45. The intraday hourly chart shows the early morning rally but there is a sequence of lower highs and the resistance around 123.15/123.30 will be worth watching today. A negative payrolls report today would strengthen the yen and could drive a breakdown.
The bullish upside break completed yesterday on a decisive close above $1.0520. This came with the second consecutive strong bull candle which took the pair to a three week high. The bulls will now be eying the resistance between $1.0650/$1.0670 from the December peaks. The momentum indicators continue to improve with the sensitive Stochastics especially reflecting the pick-up. Although I am happy to still go with this as a near term rebound, I see this as a bear market rally which will come up against some further selling pressure in the coming weeks. The daily RSI is into the mid-50s now and 60 has been limiting for the past few months during the sell-off. It is Non-farm Payrolls today and the market is just consolidating slightly in the early moves. Expect volatility on the announcement this afternoon. The pivot around $1.0500 is back in play with an initial support band $1.0480/$1.0500.
Sterling moves strongly higher for a second consecutive day yesterday as the dollar weakness impacted across the forex major pairs. The close back above $1.2330 and the near term resistance at $1.2387 suggests the bulls are having a near term run. This is reflected in the sharp pick up in the Stochastics and arguably opens the near term upside having completed a small base pattern breakout that arguably implies s bear market rally projection of another 190 pips. However, the breakout has though come under some corrective pressure overnight and the bulls will be keen to hold on to the support at $1.2330/$1.2360. There will be a lot of volatility this afternoon with the payrolls data however if the bulls can hold support then a recovery can continue. I do remain a seller into strength and believe that upside will be limited before further selling pressure resumes. Yesterday’s high at $1.2430 is now resistance.
The yen strength and dollar weakness has driven a completed a breakdown below 116.02 and confirms a near term top pattern. The move now implies around 250 pips of downside which puts the market into the band of support between 112.85/114.82. The deterioration in the momentum indicators continues with the Stochastics in sharp decline. It will now be interesting to see how the bulls can react to today’s pullback with the resistance of the neckline around 116.00. The hourly chart shows there is now resistance between 116.02/116.80 which needs to be overcome to defer the top pattern. Dollar/Yen will tend to be one of the most sensitive pairs to the Non-farm Payrolls report so the volatility can be expected to be high this afternoon. The initial support is yesterday’s low at 115.04.
The gold price recovery continues as the market has posted another strong bull candle. The move saw a decisive close back above the 61.8% Fibonacci retracement at $1172 and a move into the resistance between $1180/$1187. However over the medium term outlook I believe that this resistance will be limiting. The original long term breakdown below $1200 has left plenty of overhead supply between $1180/$1200and with the RSI again up to 60 yesterday (an area that has consistently been limiting since August). The early dip lower comes as the market consolidates slightly in front of the payrolls data this afternoon. This has left near term resistance at $1184.90 and the hourly chart shows support initially at $1170. I feel that this rally is still in process but is beginning to become limited and I remain a seller into strength for medium term downside to resume in due course.
The impact of the big bearish engulfing candle is still playing out on the chart despite the last two days of gains. The outlook is less bullishly configured now and the market could begin to range between the support of the breakout around $52.00 and the resistance at $55.25. The second consecutive positive candle yesterday has helped to improve the momentum indicators which had threatened to turn more correctively configured and today’s candle will be seen as a barometer. If a third straight bull candle can be posted then the bulls will begin to become more confident, however a corrective move will again question the appetite to chase the market higher and would help to engender more of a consolidation move. The hourly chart shows that $52.80 support now protects $52.00. Resistance is at $54.10.