The US non-farm payrolls are bound to take centre stage today, with the market looking for another strong monthly increase of +190k after last month’s gain of +192k jobs. Furthermore, analysts expect the unemployment rate to stay down at 8.9%, and thereby solidify the perception of improvement in the US labour market. However, we feel that more important than today’s one-off employment readings are the hawkish murmurs from Fed members this week that have been growing in both number and scope. Minneapolis Fed President Kocherlakota was on the wires yesterday, stating that he was concerned at the likely future path of CPI, and revealed that QE2 had boosted inflation expectations more than he anticipated. This boosted the USD steadily, although comments initially garnered an even more pronounced move as reporters misinterpreted his remarks about the application of the Taylor rule, which would suggest some 75bps of tightening was warranted. Overall, the message that we take from Kocherlakota and Lacker earlier in the week is that Fed opinion is clearly starting to shift away from complete loyalty to ultra-loose monetary policy. It seems very unlikely that there would be enough support for a possible QE3 program once QE2 has run its course, and indeed the murmurs about cutting QE2 short before its completion are starting to grow. The trend in the US is therefore beginning to echo the shift seen in Europe, where focus on two-way risks is replaced by debate about when monetary policy should start to be tightened. We feel the inevitable result of this shift will be a renewed focus on carry trades, and that EURJPY represents one of the best opportunities to exploit global monetary tightening going forward. The JPY is one of the few exceptions within the G10 space which has absolutely no prospects for rate hikes on the horizon, and will surely revert to its classic role as the funding currency of choice. As for the EUR, the ECB meeting next week (7 Apr) is almost certain to yield a hike of 25bps from Trichet and his colleagues; and indeed we expect this to be the start of a string of hikes after yesterday’s CPI print yet again exceeded estimates at 2.6% YoY in March.
12:30 USD Nonfarm payrolls (Mar) exp: 190k prev: 192k
12:30 USD Unemployment rate (Mar) exp: 8.9% prev: 8.9%
14:00 USD ISM manufacturing index (Mar) exp: 61.0 prev: 61.4
The Risk Today: EurUsd Plenty of USD-supportive rhetoric from the Fed in the past few days has created a headwind for EURUSD’s upside progress, but we still feel that yesterday’s break of a 1-week downtrend channel is a good indicator that the next significant move will be higher. Next topside levels from here are seen at 1.4249 (22 Mar high) and 1.4281 (4 Nov high), before a much longer gap until 1.4415 (19 Jan 2010 high). Buyers on dips are likely to lurk around the back side of the former downtrend channel (currently 1.4115), then 1.4023 (28 Mar low), 1.4000 psychological support, 1.3980 (18 Mar low), 1.3856 (15 Mar low), 1.3744 (2 Mar low), and 1.3705 (24 Feb low).
GbpUsd It’s been a choppy range for GBPUSD over the past 24 hours, with decent support towards 1.6000 ensuring a floor on the downside, but plenty of EURGBP demand preventing any progress on the topside. As long as 1.6000 holds, we are biased towards the next move being upwards; from here the first resistance level of note is yesterday’s high 1.6151, but beyond that we have very few pockets of supply marked until 1.6270 (24 Mar high), and then another long gap until the next resistance level around 1.6400. Should 1.6000 support break down then it would open up the possibility of move to 1.5937 (28 Mar low) and then 1.5823 (31 Jan low).
UsdJpy After consolidating around 82.50-83.00 levels for the past couple of days, USDJPY found a boost from hawkish Fed rhetoric yesterday, and has been propelled higher to 83.74. The rally negated a number of resistance levels at 83.30 (11 Mar high) and 83.55 (18 & 21 Feb highs), so now the key resistance level overhead is the psychologically important 84.00 level (which is also roughly the 16 Feb high). Weak resistance is eyed just above at 84.40 above, followed by 85.40 (24 Sep high) and 85.93 (16-17 Sep highs). Downside supports are noted at 83.20 former resistance now turned support, then 81.55 (this week’s low water mark), 80.51 (18 Mar low) and 78.25 (17 Mar low).
UsdChf The 2-week uptrend channel is the main driver of USDCHF price action at the moment, and yesterday we saw a quick test of that channel’s lower boundary (around 0.9125) elicit a strong rebound higher. Buying on dips is therefore the most sensible strategy; next resistance levels to watch are 0.9276 (30 Mar high), 0.9317 (14 Mar high), 0.9369 (9 Mar high) and 0.9392 (23 Feb high). Key support on the downside is 0.9140 which is not only where the pair bottomed out on Tuesday, but also where the lower edge of the 2-week downtrend currently comes into play. Only a break below 0.9140 would dent our bullish bias, as a move down through there would open up a possible return to 0.9030 (24 Mar low) and 0.8964 (17 Mar low).
Similar Posts:
- Swiss Franc Hits Record Highs
- Inflation Still A Concern, But RBA Unlikely To Hike Until July
- Risks Now Skewed To The Upside For Sterling
- Riksbank Hikes Rates, Swiss Franc Surges To All-Time Highs vs. Euro
- EU Summit Conclusions Should Boost EURUSD Above 1.4500
