NFP To Remain Strong Despite Faltering Economy
Swissquote Bank Ltd | Feb 05, 2016 07:15AM ET
Key Risk - China FX Reserve Data (by Peter Rosenstreich)
We are unmistakably watching a currency crisis unfold in slow motion. While the end-game is not preordained in our view, we are heading in that direction (i.e. crisis). Lines have been drawn and positions taken. The Chinese State Administration of Foreign Exchange (SAFE) has gone on the offensive this week to offset damage done by RMB speculators. Recently public comments by well-regarded and significantly funded asset managers indicate their expectations for further RMB devaluations. SAFE's new head, Pan Gongsheng (old PBoC deputy Governor) stated that FX reserves remain sufficient and anticipates a current account surplus in 2016. He continued to say that there was no basis for continued yuan devaluations and yuan rates will remain stable, and finally, suggesting that the Chinese economy is in reasonably solid shape.
This is a very different narrative than what is circulating in financial communities. Global investors are increasingly uncertain about China's economic strategy and its ability to manage rebalancing and therefore halt capital outflows. Despite policy miss-steps in 2015, we remain cautiously optimistic that China has the firepower to stimulate domestic demand while managing capital outflows (without the nuclear options of stricter capital controls). However, in the near-term capital outflows are undoubtedly mounting, potentially getting out of control. It is estimated that outflows have reached $676bn in recent years. To combat the pressure on RMB, the PBoC has had to dig deep into foreign reserves ending in a $140bn intervention in December. On Sunday, ahead of the Chinese New Year holidays, China will release data on FX reserves. Bloomberg estimates are expecting a significant $120bn decline yet our expectations are for an even deeper fall of $145bn. This would mark the largest decline in FX reserves ever and rapidly intensify investor’s skepticism surrounding China’s capabilities (including ability to manage peg). Further devaluing in RMB will have a profound disinflation impact on a already fragile global economy while sparking regional competitive devaluations. Sunday's FX reserves data will be critical in setting the market’s sentiment for next week.
Markets are bearish dollar but expect strong NFPs (by Yann Quelenn)
Over the last two days, the dollar has endured its biggest loss since July 2013. EUR/USD is trading slightly below 1.1200. Indeed, there are growing concerns about U.S. fundamentals and in particular the ability of the Fed to achieve 2% inflation. Today’s payrolls will be closely scrutinized especially after the solid ADP last Tuesday. 190k jobs creations are expected vs 292k a month before. For the time being, the better jobs conditions have not pushed inflation up despite the fact that it was widely expected. Markets are pricing in worse economic conditions in the U.S. amid issues regarding the true state of the U.S. economy.
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If inflation does not clearly pick up then the Fed will not have much room to act to achieve its dual mandate. Fed Chair Yellen has announced that she is not very convinced about negatives rates and their effectiveness. She should also admit that massive QEs are also far from being efficient. But passivity is not an option so negative rates, or QE4, or both seems to be the direction in which we are heading. We are bullish EUR/USD as we believe that policy divergence is coming to an end for 2016.
Gold - Solid Momentum.
Yann Quelenn
EUR/USD is pushing towards daily resistance at 1.1387 (20/11/2015 high). Hourly support may be found at 1.0711 (05/01/2016 low). Yet, expected to show further consolidation. In the longer term, the technical structure favours a bearish bias as long as resistance holds. Key resistance is located region at 1.1453 (range high) and 1.1640 (11/11/2005 low) is likely to cap any price appreciation. The current technical deteriorations favours a gradual decline towards the support at 1.0504 (21/03/2003 low).
GBP/USD's growing short-term momentum is consolodating. Hourly resistance can be found at 1.4969 (27/12/2015 high). Hourly support can be found at 1.4081 (21/01/2015 low). Expected to show further increase. The long-term technical pattern is negative and favours a further decline towards the key support at 1.3503 (23/01/2009 low), as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200 day moving average). However, the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound.
USD/JPY is weakening for the 4th session in a rowm moving to 116.00 from 122.00. Hourly resistance lies at 123.76 (18/11/2015 high). Hourly support lies can be found at 115.98 (20/01/2016 low). Expected to show further decline. A long-term bullish bias is favored as long as the strong support at 115.57 (16/12/2014 low) holds. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) is favored. A key support can be found at 116.18 (24/08/2015 low).
USD/CHF is holding below parity. Hourly support is located at 0.9786 (14/12/2015 low) and hourly resistance can be found at 1.0328 (27/11/2015 high). Expected to show continued decline. In the long-term, the pair has broken resistance at 0.9448 and key resistance at 0.9957 suggesting further uptrend. Key support can be found 0.8986 (30/01/2015 low). As long as these levels hold, a long term bullish bias is favoured.
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