A 150 pip move down for EURUSD took the pair below the narrow range from 1.43 t0 1.45 (give and take) we had had for the last 2 weeks. Technically it looks more like the move at the start of July than the one we had at the end of July.
The first one took us down from 1.46 all the way to 1.40 and while the pair then had a few hours drop all the way down to 1.3850, the sharp and speedy recovery up above 1.4030 again, almost made us conclude that 1.40 held at that time.
I see now reasons to change my 1.40 to 1.50 range which I have had as a medium term outlook for more than 5 months. Compared to early July there are two fundamental outlooks looking different now.
The first one is that the global economic slowdown is better documented today than two months ago and while that has increased risk aversion, it is in my view still the case that US is and will be worse hit by this slowdown than what is the case for Europe. I maintain that view despite worse than expected manufacturing indices in Europe and slightly better indices in the US as seen released today. As such I see no reason for EURUSD to be hit by the global economic scenario.
The second one is that earlier this year the prospect for rate increases in Europe was significant and we also got short term rates set higher by the ECB. Now inflation seems to come down a bit in Europe and further rate increases are in my view out of the question for this year. Should inflation come further down, the prospect for rate cuts in Europe could definitively be on the agenda. Only when I see the clear prospect of lower short term rates in Europe, I will see this as an argument for lower EURUSD.
The fundamental changes over the last two months are not substantial enough to change my outlook that 1.40 will hold to the downside.
Technically – I see certain similarities to the move we had in the beginning of July and if repeated we could see a move further down from 1.4250 to 1.4000.
In the US all about jobs these days and today’s non-farm payroll figures are the major figure to follow every month. We get unemployment figures at the same time – but the interesting figure is how many new jobs were created last month. The release is @ 12:30 GMT.
Estimates have been adjusted downwards lately and in a Bloomberg survey of yesterday, consensus for the NFP figure is now at 68 000. This is a bad figure – almost anyway you see it. The question is – will it be worse or better than what is expected?
ADP figures released on Wednesday should give a clue to NFP – but traditionally it hasn’t. Divergence has been too big over too many months. I simply don’t look upon ADP as any indication for NFP anymore.
I pay more attention to the manufacturing indices from Richmond, Dallas and Philadelphia Fed which were bad earlier this month and while yesterday’s ISM gave grounds for certain optimism, I am worried that today’s NFP might be as low as 25-50 000.
Should NFP be far from consensus you always get substantial volatility for EURUSD. +/-100 pips might very well be the first reaction – and the reaction afterwards is depending on how far from consensus is the figure and which way.
I am tempted to make the following predictions for EURUSD – either way the figure comes out – and the argument goes along the following way:
- Should the figure be better than consensus, US stock markets will react positively and EURUSD should react the same way. It doesn’t really make sense that USD should go weaker from better NFP – but as long as stocks reacts positively, then EURUSD tends to follow.
- Should NFP come out really bad and much worse than expectations, the likely first reaction is a dip for US stocks and a dip for EURUSD. On reflection – and I am here talking about a really bad figure – stock markets might turn around in the expectations that Bernanke and Fed will react quickly to the bad job situation and actually introduce a QE3. That would be bullish for US stocks and the same for EURUSD. So the worse the NFP will be, the more likely it is for QE3 to come and US stocks might pick up from that increased probability. That is after the first reaction, which likely is negative.
- Should NFP come within a small range of consensus, I don’t know what the reactions in the stock market will be – nor do I see the direction for EURUSD from a “neutral” figure.
What else is on the agenda for today? Only European PPI @ 09:00 GMT, which is important enough but when falling on the same day as US NFP, the effect on any markets is likely going to be muted.
I intend to participate in the volatility play in connection with the release of NFP. Leading up to the figure I’m tempted by a small long EURUSD position.
Good Luck and be careful out there.