Dollar Hollar: NFP’s Coincide With Key Technical Test

Tomorrow’s Non-Farm Payrolls will coincide with a key technical test for the USD. Post the FOMC flip flop by FED Chair Yellen in September the USD has been drifting higher.

It seems the market is willing to continue to bid up the USD as market participants play they buy the rumour sell the fact trade set up. As we know the markets act as a forward-looking discounting mechanism.

Since the FOMC disappointment, a host of FED speakers have been on the wires stating their preference for a rate move before the end of the year. These hawkish overtones have seen the USD recover the post FOMC losses and trade back towards the upper end of its recent range. As is often the case fundamentals and technicals are about to coincide at a key juncture.

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Fundamental Fluctuations

So let’s take a closer look at the fundamental and technical dynamics in play as we head into tomorrow key release.

The US has been the core focus of markets through the end of September. FED Chair Yellen, like other Central Bankers, has been keeping the markets guessing as to rate expectations. After delivering a dovish wait-and-see message at the September meeting she has turned course in recent speeches. The Chair has gone as far as to state that a rate hike is likely coming before year-end bar any meaningful economic surprise.

This week’s headline data has been a mixed bag for the Dollar. US personal income slowed to 0.3%m/m from previous 0.5%. While personal spending steadied at 0.4%. PCE core steadied around 0.1%m/m. Pending home sales fell -1.4%m/m, way below consensus of 0.4%. With the FED data dependent, the key data reference point for this week will be tomorrow Non Farm payrolls release. Yesterday’s ADP data came in better than expected and has the market is expectant of in line or better official data tomorrow.

One further obstacle that was overcome this week was that U.S Congress averted a government shut-down on Wednesday. by approving a temporary spending measure to keep federal agencies operating through Dec 11. Market watchers have floated the idea that Fed might find it easier to hike in the Oct 27-28 meeting now that the Oct shut-down is averted instead of Dec 15-16 meeting where the next round of budget talks might complicate things.

So with quarter and month end flows out of the way attention shifts to Thursday’s economic docket which brings the usual weekly initial claims, expected to rise to 271k from 267k. The final September Markit manufacturing PMI data is poised to come in at 53.0. Thereafter, we should see a 0.5% increase in August construction spending whilst September’s ISM manufacturing index is expected to ease to 50.6 from 51.1.  Bar any surprises we expect the data come in broadly in line and the Dollar to trade sideways ahead of the big release tomorrow.

2015-09-30 10_42_53-United States Non Farm Payrolls Forecast

We look to tomorrow payrolls release as a pivotal point in continuing to build expectations for a Q4 2015 rate move and keep the buoyant Dollar trade supported. With such a low print last month and low expectation heading into the number, it feels like the risks are skewed more to the upside and a positive surprise. (Take a closer look at our full monthly NFP Preview). If this upside surprise is delivered, we can expect to see some interesting technical action on the USD chart.

Technical TakeAways

So lets jump into the charts and see where the technical sets ups are developing.

The Dollar is trading towards the upper end of it recent range and their are some interesting sentiment and technical observations.

From a sentiment perspective recent COT data continues to suggest that the market is reducing its Dollar long exposure. Considering this trade has been extremely crowded this reduction in long bets bodes well for a further grind higher.

Technically speaking the USD is testing a key inflection point, it has been testing offers at the 96.50 level. A positive NFP number could see price run stops above the market and head towards the crucial descending trend line resistance which under this bullish scenario should give way and then price should retest year to date highs. One of my favourite set ups is the the flag break and pull back as the market is dragged higher and then drops to run the stops of late longs before ripping higher. (As highlighted in the chart below)

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The bearish scenario would be for a weaker NFP release tomorrow and the USD to return the lower end of the recent range. Under a bearish scenario price would most probably retest the near term ascending trend line support. I would expect a small bounce here to meet resistance and roll over to retest the lower end of the  range. (As highlighted in the chart below)

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Trading Take Aways

Bullish playbook

  • Look for price to break 96.50 resistance running stops, enter longs into the stop run placing protective stops below 95.00 targeting the next upside objective at 97.50

Bearish playbook

  • Look for price to test ascending trendline support  at 95.00 sell a bounce back towards 96.00 with protective stops placed above 97.00 targeting a decline towards range lows.