Weekly Trading Notes: Non-farm Payrolls and UK election to drive sentiment

KEY DRIVERS

  • The dollar has survived a correction that could have resulted in the long term breakdown of the big bull trend. After nearly 3 weeks of corrective pressure the sentiment has begun to improve again. Exactly how long this lasts for remains to be seen. The improvement has come after the FOMC meeting which was seen as slightly more hawkish than previously anticipated. US economic data remains key, with ISM Non-Manufacturing data and the crucial employment data towards the end of the week (ending with Non-farm Payrolls). The Dollar Index needs to be watched closely, with key resistance now coming in at 96.17.
  • Non-farm Payrolls will quickly become the focus for traders this week, especially in light of the recent sharp deterioration in Payrolls to the lowest since December 2013. The expectation is for a recovery from the 126,000 posted last month back to 224,000. Any revisions to the prior month’s data will also be keenly watched. Average hourly earnings are forecast at +0.2% for the month which equates to around +2.2% for the 12 months so was are still not expected to pick up demonstrably. A pointer to the Payrolls data may also be the ADP employment report which last month called a deterioration.
  • Greece is still an issue with no agreement as yet between the lenders and the Greek government over the payment of the final €7.2bn of bailout money. The feeling is still that the deal will get done and that it is just a matter of time. It is interesting though that the Greek 2 year yield is well down from its peak of 30% in recent weeks, now back at 21% so this would suggest that financial markets are fairly relaxed about the situation. Also, the European economy has been improving recently though and there are certainly signs of a pick-up which have resulted in the EU raising its Eurozone GDP forecast by 0.2% to 1.5% for the year. The inflation target has also been raised with 2015 CPI forecast increased from -0.1% to +0.1%.
  • The UK General Election is likely to be a volatile event, especially for sterling. The one-week sterling/dollar implied volatility option for covering sterling over the next week has spiked to a 5 year high, in fact it is the highest since the 2010 General Election in the UK where there was also no overall victor which resulted in a hung parliament. The cost of the option is also higher than it was during the peak of the uncertainty surrounding the Scottish Referendum in September 2014. That would all suggest that this week is likely to see wild swings in sterling crosses, especially Cable and Euro/Sterling.
  • Commodities remain choppy. Precious metals are rangebound, with Gold and Silver both having been trading sideways in the past  few weeks. The oil price continues to creep higher. The interesting feature here seems to be that the negative correlation between commodities and the strength of the dollar appears to have broken down for the time being.
  • Equity markets remain volatile and there is little really consistent trend. The S&P 500 continues to fail to breakout, whilst the DAX does seem to continue to have a negative correlation with the euro. FTSE 100 is also rangebound and could easily take direction off the General Election result (even though around three quarters of revenues are based abroad.
  • In other events, watch for the China Trade Balance which could help to drive risk appetite.
  • Watch for: ISM Non-Manufacturing, UK General Election, Non-farm Payrolls

NFP

MARKETS

EUR/USD – A close below support at $1.1035 is a sell signal    

  • The FOMC meeting last week has taken he wind out of the sails of the rally on EUR/USD, however there is still a feeling that any moves are still data dependent. That makes this week’s key payrolls data extra important. A second straight number below 200,000 would pose some serious questions of the US recovery and impact on the dollar significantly. Any confirmed improvement in the Greece/Eurogroup negotiations would also help to underpin EUR/USD.
  • The big near term test is the support at $1.1035/$1.1050 that is the old breakout levels. So far these are holding but the technical are threatening to roll over.
  • Watch for: ISM Non-Manufacturing, Non-farm Payrolls

GBP/USD – Significant volatility with the UK General Election on Thursday

  • There is still no daylight between the two leading parties (Labour and Conservatives) and a hung parliament could result in weeks of political uncertainty and perhaps even a second election this year. That would be bad for sterling and as such expect some significant volatility surrounding the result which will be due early Friday morning. With Non-farm Payrolls added into the mix, Friday could be extremely choppy.
  • Volatility has certainly already increased in the past week, but the rally that had been so strong for 3 weeks is now threatening to reverse. A sell signal on the Stochastics and MACD that is also rolling over does not bode well for the continuation of a rally. The support band around $1.5000 needs to be watched as a support level, whilst $1.4850 is the key near/medium support now. Key resistance is at $1.5496 under the February low at $1.5550.
  • Watch for: UK General Election, Non-farm Payrolls

USD/JPY – Range trade continues between 118.30/120.85 (pivot around 119.40)

  • The slightly hawkish FOMC maintained the range that has formed and a rally has set in. There is no real sign of any significant breakout as this safe haven has consolidated over recent months.
  • Still no suggestion of a break either higher or lower from the range 118.30/180.85 as the rally off 180.50 is already losing impetus. The run of two or three trading days in a single direction before a complete retracement continues. Play the range.
  • Watch for: Non-farm Payrolls

Gold – The range between $1175/1224 continues

  • Another range play in which it is interesting that the negative correlation between gold and the dollar seems to be taking a momentary break. Increasingly becoming a technical trade within the range, however in recent months this period has come to a spectacular end with Non-farm Payrolls which rejuvenates the negative correlation with the dollar.
  • Intraday breached of $1178 have been seen on three days but with the absence of a closing breakdown the range continues intact. Until there is confirmation of the break continue to play the range. There are a couple of bullish days currently underway, but history within the range (now $1170/$1224) would suggest looking for sell signals as the price moves towards the initial resistance at $1215. The price is currently mid-range with momentum indicators very near term having turned slightly positive.
  • Watch for: Non-farm Payrolls

Indices – Wall Street challenging the highs, DAX negative correlation to euro continues

  • S&P 500 – Earnings season has been unable to break the shackles as the macro economic data has shown the US economy struggle and the suggestion that the strong dollar has been holding back revenue growth. The S&P 500 has failed to achieve a closing break above the February highs so resistance remains at 2125. There is still a slightly positive bias but it is very choppy in making slow progress. Support at 2072/2078.
  • DAX Xetra – The DAX completed a head and shoulders top pattern below 11,620 which implies 10,850. The pullback rally has found resistance around the neckline too as price and momentum indicators are increasingly showing corrective signals. A move below 11,330 support would open the selling pressure. Above 12,079 to abort the pattern.
  • FTSE 100 – An uptrend since December has held intact and the buyers have supported the FTSE 100 at 6906. Again, like the S&P 500, this is a generally positive chart with a slightly bullish bias, but the choppy nature to the trading continues. Mind out for the resistance that has built up around 7120.

Calendar

WATCH OUT FOR THIS WEEK

Tuesday 5th May

  • US – ISM Non-Manufacturing PMI
  • New Zealand – Unemployment

Wednesday 6th May

  • UK – Services PMI
  • US – ADP Employment Report
  • US – Crude Oil Inventories

Thursday 7th May

  • Australia – Unemployment
  • UK – Parliamentary Elections (result on Friday 8th May)
  • US – Weekly Jobless Claims

Friday 8th May

  • Japan – BoJ meeting minutes
  • China – Trade Balance
  • Switzerland – CPI Inflation
  • UK – Trade Balance
  • US – Non-farm Payrolls
  • US – Average Hourly Earnings

 

NEXT WEEK

Monday 11h May

  • UK – Bank of England monetary policy

Tuesday 12th May

  • UK – Manufacturing Production
  • US – JOLTS job openings

Wednesday 13th May

  • China – Industrial Production
  • Eurozone – Germany GDP
  • Eurozone – GDP flash
  • UK – Unemployment & Average earnings
  • UK – Bank of England Quarterly Inflation Report
  • US – Retail Sales
  • US – Crude Oil Inventories

Thursday 14th May

  • US – Weekly Jobless Claims
  • US – PPI

Friday 15th May

  • US – Empire State Manufacturing Index
  • US – Industrial Production and Capacity Utilization
  • US – University of Michigan Consumer Sentiment (prelim)

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