Markets Look to US Non Farm Payrolls for Direction

The Euro is maintaining its long term downtrend, falling to new 15 month lows against the US Dollar (USD) before economic reports which are expected to show declines in both consumer confidence and personal spending within the Eurozone.  Confirmation of these declines will lead to additional speculation that the regional debt crisis will be harder to resolve and this will put additional pressure on the risk currencies.  The Euro is also trading at 11 year lows against the Japanese Yen (JPY) ahead of important bond auctions in both Italy and Spain and after the French auction yesterday which saw higher yields in long term treasuries.

The USD has been one of the biggest market gainers this week and this is coming in anticipation of the national employment report at the end of this week.  The monthly Non Farm Payrolls number is expected to the biggest increase in the last three months for the month of December.  The US Dollar Index, which tracks USD performance against its major trading partners is now seen at its 52-week high.  The biggest component of the index, the EUR/USD, saw lows of 1.2760 before making a small bounce.  Year to date, the EUR/USD is already showing a drop of 1.5 percent and has made declines for five weeks in a row.

Yesterday’s macro data showed that German Retail Sales were lower by 0.4 percent for the month of November (after a 0.1 percent rise previously).  Other significant event in the region came with the French bond auction, where 10-year treasuries sold at yields of 3.3 percent with the bid-to-cover ratio falling to 1.6. This ratio measures the number of bids relative to the amount of debt sold, and this shows that investors are lacking interest in French debt despite the country’s AAA credit rating.  The next Spanish auction will take place on Jan. 12th and Italy will have their auction on the 13th.

Looking ahead, the main event is clearly the US Non Farm Payrolls, which is expected to show improvements in the employment market.  Earlier data (the ADP report) showed that private companies increased payrolls by 325,000 for the month of December, which is the highest level since 2001 and this has led many analysts to revise higher their NFP estimates which are now calling for a rise of 155,000 new jobs for the month (after 120,000 previously).  The unemployment rate, however, is expected to have ticked higher to 8.7 percent.  Look for positive surprises to bring brief strength in the US Dollar, followed by declines as investors use the optimistic data to move back into the higher yielding options.

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The EUR/USD is making some significant long term support breaks, so we will pull out to the weekly charts to get an idea of the bigger picture.  The latest major break came at the 1.28 level and since we are already through most of the key Fibonacci supports, the outlook is heavily bearish for the longer term.  That said, we will wait for better prices before getting long USD again, as corrective bounces are becoming more and more likely.

The S&P 500 is continuing to trade at elevated hourly levels and we are starting to see an ascending triangle condition on the dailies.  Resistance is coming relatively close but the MACD indicator is bullish and we are seemingly on the verge of a fresh upward moving average cross, so a break of 1285 cannot be ruled out.