Dollar Saved by Strong Non-Farm Payrolls Report

Forex Weekly Review and Outlook

Dollar Saved by Strong NFP, FOMC Minutes & ECB Featured

After being pressured most of the week on disappointing data, dollar was saved by a strong non-farm payroll report on Friday and ended the week mixed, higher against European majors but lower against commodity currencies. Low yield currencies Yen and Swissy, in particular the yen, weakened sharply as carry trade is back into play. Both BoE and RBA kept rate unchanged but the fortunes of Sterling and Aussie were different as Sterling weakened after the rate decision while Aussie was supported and surged to new 10 year high as benefited by carry trades. Central banks will remain the focus this week with FOMC minutes, ECB and BoJ meeting on the card.

The main good news from US data was the upside surprise in Non-farm payroll report that showed 180k job growth in Mar, much better than expectation of 120k. Feb’s figure was also revised upward to 113k. Jan’s figure was revised upward to 162k. An average of 152k job growth in Q1 was solid. Unemployment rate dropped to 4.4%, matching last Oct’s low. Both ISM indices were disappointing, with the manufacturing index dropped to 50.9, just a touch above 50. Non-manufacturing index dropped to 52.4, lowest reading since Apr 03. Both suggest activities were continuing to slow down on a broad sense across industries. However, note that price components in both indices surged above 60 in the month of March, suggesting pipeline inflation pressure remains strong. Coupled with a strong employment report, there could be little room for a rate cut from Fed yet.

Both Manufacturing and Services PMI in Eurozone were steady in Mar at 55.4 and 57.4 respectively. Feb PPI was basically inline with expectation by rising 0.3% mom, 2.9% yoy. Feb retail sales was helped by upward revision in Jan and rose 0.3% mom, 3.9% yoy. Data from Germany were solid with factory orders rising 3.9% mom, 9.3% yoy, industrial production rising 0.9% mom, 7.7% yoy.

Japanese Tankan reading for large manufacturers moderated from 25 to 23 in Q1. The all industries index for also eased from 10 to 8 this period. Meanwhile, the readings for large non-manufacturers and all large industries held steady over the quarter, at 22 and 23. Capital expenditure rose 2.9%, beating expectation of 1.7%. After all, even though the confidence indices were slightly weaker than expected, outlook for key business sectors remains solid and investment is still expected to increase moderately in the near future. But the yen was continuously pressured as carry trade came back into play and the yen weakened to new record high against Euro.

There were increased speculation for a rate hike from BoE last week but was disappointed after BoE kept rate unchanged. Sterling was pressured since then and ended the week lower against dollar and euro. Despite being on hold, another rate hike is still widely expected in Q2 as this is already priced into BoE’s forecast to bring inflation down to 2% by year end. Timing is still a question but May is still the more likely choice. Focus will be turned to the MPC minutes to be released on Apr 18 as well as CPI inflation data on Apr 17 for hints to confirm this expectation.

RBA also kept rate unchanged last week, contrary to some expected. It’s believed that RBA will want to wait for Q1 inflation report, which is to be released on Apr 24 before making the move. Strong reading of above 3% inflation will likely prompt RBA for another hike in May. Aussie was supported by carry trade flow and still managed to surged to new 10 year high against dollar despite the RBA disappointment.

The Week Ahead

Even though some of the Fed’s view on last statement was elaborated by Bernanke in his testimony to Joint Economic Committee after the FOMC meeting, the minutes for Mar meeting will also be closely watched, in particular for views from different voting members. As the economy continues to develop in a way that inflation pressure remains high, labor markets remain tight while capital spending and housing continues to slow down, the Fed’s rate decision will become tighter and the change in hawkishness and dovishness of individual voting member will become more important. Other important indicator include Feb trade balance, Mar import prices and Producer price index.

ECB meeting will be the main event from Eurozone. Though ECB is widely expected to keep rate unchanged at 3.75%, focus will again be on the post meeting press conference. Hawkish rhetoric is expected from Trichet that maintain tightening bias firmly. Another rate hike in Q2 is widely expected and will likely be in June. So no “vigilance” is expected from Trichet this time.

BoJ will meet this week and is widely expected to keep rates unchanged at 0.5% again this time. Focus will be on whether Fukui will respond to recent CPI weakness. Meanwhile, new Board Members Kamezaki Nakamura will hold their first press conference. G7 finance ministers will meet in Washington at the end of the week, and markets will also pay attention to any comments leading to and after the meeting.


After extending the rise from 1.9545 to 1.9824, cable reversed by retreating back to as low as 1.9636 to end the week lower. Short term rising channel is taken out by the fall from 1.9824 and together with bearish divergence condition in 4 hours MACD and RSI, a short term top should be in place at 1.9824 already. Hence further correction should be seen towards 1.9545 support. However, downside of the correction should be contained 1.9434 cluster support (1.9183 to 1.9824 at 1.9428) and bring another rally. On the upside, above 1.9724 resistance will indicate that the fall from 1.9824 has completed and should bring retest of this high. But firm break of 1.9824 is needed to confirm recent rally has resumed. Otherwise, consolidation will still extend further with risk of another fall before completion.

In the bigger picture, rise from 1.8090 is still in progress after corrective fall from 1.9913, which should have completed with three waves down to 1.9183, was supported by 1.9215/17 cluster support (50% retracement of 1.8517 to 1.9913 at 1.9215, 38.2% retracement of 1.8090 to 1.9913 at 1.9217). The rise from there should represent resumption the whole rally from 1.8090 and hence further upside is expected. However, with bearish divergence conditions being displayed in weekly RSI and daily MACD a medium term top could be around the corner. The up trend from 1.7047 could make a top after reaching 2.0046/0106 cluster resistance zone (1992 high, 100% projection of 17047 to 1.9024 from 1.8090 at 2.0067, 61.8% projection of 1.8517 to 1.9913 from 1.9183 at 2.0046. And hence, focus will be on reversal signal as cable approaches these levels.

On the downside, below 1.9434 cluster support will dampen the above view and argue that the whole rise from 1.9183 has completed. Focus will then be turned back to 1.9215/17 cluster support and sustained break will indicate that the whole up trend from 1.7047 might have completed earlier then we thought and should the bring deeper correction to 1.8517 support first.

In the longer term picture, the break above 1.9554 resistance (04 high) is favoring the case that long term up trend from 1.3680 has resumed after correction from 1.9554 was supported by 55 months EMA. However the structure of the medium term rise from 1.7047 is not clearly supporting this yet. And, we’re still skeptical on it. The structure of the fall after finishing the current up trend from 1.7047 should reveal more information.

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