Will NFP Sputter Underlying Dollar Strength?

The Greenback was weakened against most of its peers yesterday, only printing marginal gains against the British Pound, beaten after the BoE announced to increase their asset purchase program. On the backdrop of recent Central Banks decisions to engage on further easing, pressure is now on the Fed on trying to tackle the risk of recession in the US.

Analysts, amongst them Kathy Lien, Director of Currency Research at GFT, know the sense of urgency to go through another round of asset purchases by the Fed “will largely hinge upon the degree of job growth in the month of September” she says. Although economists are looking for 55k job growth, Kathy believes that “the magic number is 100k”. Job growth between 25k and 100k will be considered weak.

Kathy adds: “Earlier this week, Fed Chairman Ben Bernanke told the Joint Economic Committee the Fed stands ready to provide liquidity in the U.S. through a broad-based lending program. He sounded extremely concerned about the outlook for the U.S. economy and admitted that Operation Twist announced last month, had a meaningful but not enormous effect on the economy.

Amid the growing evidence that the US is heading into a double dip recession or even a prologue depression, the Fed may not hesitate at all to employ additional policy tools to stimulate the ailing economy as soon as in November, should today's NFP data disappoint yet again. However, as David Song, who is Currency Analyst at DailyFX observes: “A better-than-expected print may lead the FOMC to adopt a wait-and-see approach for the remainder of the year, and the central bank may see scope to start normalizing monetary policy in 2012."

POTENTIAL DOLLAR REACTION

On the currency front, both the Dollar/Yen and the Euro/Dollar will garner all the attention. How the dollar will react is a complex equation to resolve, one that involves the conflict of two theories. First thinking in trader's minds is that disappointing data in the US leads to higher risk aversion, which seems to be favouring the Dollar lately. On the other hand, that same downbeat reading could have traders thinking about the possibility of further easing by the Fed in the months to come, therefore an upcoming injection of additional liquidity to stimulate the US economy should impact the Dollar negatively.

Trying to unravel this complicated puzzle, Ms. Lien comments: “Investors are already short dollars against the Japanese Yen going into NFPs which means that the reaction to a weak number in USD/JPY could be limited. A strong payrolls report on the other hand could trigger a round of short covering that drives USD/JPY back towards 77.30. In contrast, lKathy also notes: "Investors are aggressively long dollars against the euro which means that at least initially a weak non-farm payrolls report will trigger a sharp rally in the EUR/USD. However as we have seen in past years, risk appetite can quickly take hold of the EUR/USD. This means that a weak number could end up being more positive for the dollar against the euro than negative.”

Source: FXStreet.com

07.10.2011