FX Technical Trends

 | Feb 07, 2014 07:23AM ET

Payroll day today. Yesterday’s ECB meeting produced no change in policy stance. With rates so close to zero already, the ECB has little room for manoeuver and since the economic news has generally been going their way, they decided to wait for more data before taking a decision. The surprise was that next month’s revision will include the forecasts for 2016 nine months before they were expected. Usually the ECB only forecasts two years in advance. This may paint them into a corner: if the ECB forecasts that inflation will remain substantially below their “close to but below 2%” target even in 2016, then they will in fact trigger the very “dis-anchoring” of market inflation expectations that they are concerned about and they would probably be obliged to loosen policy further as a result. In short, next month’s ECB meeting is going to be a key event.

The US economic data was mixed. Initial jobless claims remain around the level that they’ve been for the last several months. The trade deficit widened in December because of a decline in exports, which will subtract a few basis points from Q4 GDP growth. But unit labor costs declined for the second consecutive quarter and are now falling yoy, which may help the employment picture (but push inflation down further). Nonetheless US bond yields crept higher and the implied interest rates on Fed Funds continue to climb back up slowly as fears about an EM collapse recede. In fact EM equities outperformed DM equities yesterday, most EM currencies were unchanged to higher, and the VIX index fell sharply (-2.7 points), indicating that fear is receding from the market. Against that background, JPY was the big loser on the day as the safe-haven flows reversed. AUD/USD also fell after the RBA’s quarterly monetary policy statement said that “with the terms of trade expected to decline, the exchange rate could decline further over time.” The dollar was stable vs CAD after Canada’s trade deficit widened far more than expected in December. It was also stable vs NZD, but lost ground against the rest of the G10 currencies.

The main event today will be the non-farm payrolls for January. The December report came out much worse than expected with payrolls increasing only by 74,000 as bad weather lowered job growth. There were periods of cold weather in January as well, but the weather was more normal during the week of the survey. The market expects the figure to return to normal levels at 180k, while the unemployment rate is forecast to remain unchanged at 6.7%. If the figure comes in below expectations, people will be looking to see whether it was due to the weather again or if something more structural is at play. The way to discern this will be by looking at construction employment, which is strongly affected by the weather. Construction payrolls fell by 16,000 in December, bucking the trend of small gains during most of the year. Payroll firm ADP Wednesday said private construction employment grew by 25,000 last month. Today’s report will also include the annual revisions that could reshape the market’s (and the Fed’s) views of the labor market in 2013. The data currently show an increase of 182k jobs a month last year. The 2012 revisions added nearly 30k a month to the estimate for that year; a similar revision for 2013 would improve the perception of the US economy, probably raising interest rate expectations somewhat and strengthening the dollar. The reverse is also possible, of course.