Thin trading conditions ahead of the U.S. Non-Farm Payrolls Report on Friday and less than stellar economic news from the Euro Zone helped to weaken the Euro on Thursday. The lack of fresh news from the Euro Zone regarding debt issues is encouraging investors to return their focus to the basic fundamentals.
Early Thursday the U.S. Dollar began to rally as investors took a side regarding the outlook for the U.S. labor market ahead of Friday’s jobs report. Preliminary jobs data from the ADP Corp. and this week’s initial claims data supported a rise in the number of jobs created. A Reuters poll pegged a consensus forecast of U.S. payrolls data at 513,000 jobs created in March. Some analysts are looking for an increase of 615,000 while President Obama chimed in by saying the report would show strong growth.
Speculators supported the Dollar because of expectations that the jobs report would show the labor market stabilizing. This means that the fundamentals are getting much stronger which will bring the Fed closer to raising interest rates. Investors like the odds that the Fed will raise rates before the European Central Bank and the Bank of England, therefore fueling the U.S. Dollar strength against the Euro and British Pound.
Besides expectations of a robust jobs report on Friday, the Euro showed further weakness following a reported unexpected drop in retail sales in April. There was an upward revision to the May Purchasing Manager’s Index but that wasn’t enough to level off the market. Analysts now believe that based on the data, the next recovery is going to be triggered by renewed investment or net trade rather than by consumer spending.
Technically, the Euro is in a downtrend but trading inside of a short-term range of 1.2453 to 1.2110. Downside momentum is building which could drive this market through the low-end of the range, which could trigger a sharp break.
Early this morning the USD JPY surged to the upside. Investors were still reacting to the resignation of the prime minister and to the possibility of a slow down in the economy. Increased risk appetite also put pressure on demand for lower yielding assets. A mid-session turnaround in the stock market after early morning strength helped to weaken the USD JPY somewhat, but not enough to turn it lower.
Besides the political uncertainty developing in Japan, traders now have to deal with the strong possibility that the Fed will begin tightening should the U.S. jobs data meet or exceed expectations. This will increase the spread between U.S. and Japanese interest rates, putting further pressure on the Yen.
Technically, the Dollar/Yen finished higher but well off its high. The close over the .618 retracement level at 92.41 indicates continuing strength with 93.64 the next potential upside target.
Stronger crude oil and rising equities failed to prevent a rally in the USD CAD. This may be an indication that investors are concentrating on the U.S. economy at this time rather than a desire for risk. The daily main trend is down in the Dollar/CAD. This trend will remain lower unless 1.0573 is taken out.
Friday’s jobs data will dictate the direction in the Dollar/CAD. A strong jobs number will likely be bullish for the U.S. Dollar, sending the USD CAD higher, but after the markets settle, appetite for risk may return which will encourage demand for the currently higher yielding Canadian Dollar. Look for increased volatility and the possibility of a two-sided trade.
The commodity-linked Australian Dollar and New Zealand Dollar both closed higher on Thursday following a late session turnaround in the U.S. stock market. Appetite for risk is likely to be the catalyst in these markets. Signs of a stronger U.S. economy may weaken the Aussie and Kiwi early but conditions could shift later in the session if stock traders decide bullish employment news will help corporate profits. The NZD USD changed the main trend to up on the daily chart when it broke the last swing top at .6862. Expectations are for this market to test a 50% price at .6942 over the near-term.
The biggest concern that traders face tomorrow is the possibility that analysts overshot the jobs number. With the bar set extremely high at 513,000 new jobs created, it is possible that the actual data will fall short of expectations. If this occurs, the U.S. Dollar is likely to weaken, thereby erasing all of Thursday’s gains.
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