payrolls legacy set to drive a stronger dollar this week

Weekly Outlook

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8th June 2015 by Richard Perry, Market Analyst

Macro Commentary

Such huge volatility surrounding the dollar and the euro in recent days has meant it has been difficult to trade with any

real conviction. With huge fundamental (Non-farm Payrolls), news driven (Greece negotiations) and market driven (bund

yield volatility) moves, forex trading has lacked decisive direction. Could this change though this week? With Greece now

bundling up its repayments to the IMF to the end of the month, traders can focus elsewhere, perhaps at least for a few

days anyway. And with a dearth of key US economic data (as ever in the second week of the month), the legacy of

Friday’s Non-farm Payrolls report can be taken on board. The recent uptick in US inflation, alongside a six month high in

Non-farm Payrolls and also better than expected wage growth could begin a new dollar bull run. All these data points will

be music to the ears of the hawks on the FOMC (such as Jeffery Lacker). After weeks of disappointing US data, there is

suddenly a string of positive surprises for the bulls to point to. In the wake of the strong Payrolls report on Friday,

expectations are being reassessed and there is now a 52% chance of a FOMC rate lift off in October. Although Monday

has started with a minor correction, could we be in for some dollar gains in the coming days?

WHEN: Thu, 11th June, 1330BST

LAST: +0.1% (MoM)

FORECAST: +0.7% (MoM)

Impact: If is has been one indicator almost

guaranteed to take the wind out of the strong

dollar in recent months it has been the Retail

Sales. Throughout 2015 expectations have been

missed and the dollar has suffered. The year on

year data shows that retail sales have barely

grown at all and suggests that with consumption c.

70% of he US economy, this is an indicator that

needs to pick up decisively to suggest that there is

depth to an economic recovery. Expectation of

0.7% monthly growth would signify a first year on

year pick up since November. It would add to the

post payrolls bullish outlook for the dollar.

Must watch for: US Retail Sales

Key Economic Releases

Date Time Country Indicator Consensus Last

Tue 9th Jun 02:30 China CPI +1.3% +1.5%

Tue 9th Jun 15:00 US JOLTS job openings 5.03m 4.99m

Wed 10th Jun 09:30 UK Industrial Production (YoY) +0.6% +0.6%

Wed 10th Jun 15:30 US US oil inventories -1.95m

Wed 10th Jun 10:00 New Zealand RBNZ monetary policy 3.50% 3.50%

Thu 11th Jun 02:30 Australia Unemployment 6.2% 6.2%

Thu 11th Jun 06:30 China Industrial Production +6.0% +5.9%

Thu 11th Jun 13:30 US Retail Sales (MoM ex autos) +0.7% +0.1%

Thu 11th Jun 13:30 US Weekly Jobless Claims 277,000 276,000

Fri 12th Jun 15:00 US University of Michigan Sentiment (prelim) 91.5 90.7

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US Non-farm Payrolls

N.B. Please note all times are BST (GMT+1), data source Reuters

Weekly Outlook 8th June 2015

by Richard Perry, Market Analyst

Foreign Exchange

The dollar bulls come into the new week on a high after the surprisingly positive Non-farm Payrolls report on Friday. The

jump in payrolls to a six month high along side an uptick in average hourly earnings may still need further confirmation in

July, however after the pick up in core CPI recently, the market will once more be looking at the FOMC meetings in

September and October as potential lift-off dates. With little significant US data until Thursday this could once more drive

a strong dollar. The negative market reaction to Greece putting off its repayments on an IMF technicality is likely to also

help fuel this move. The dollar has already broken out strongly against the yen, and the dollar bulls will be eying some

key levels across the majors this week. The key support on Cable to watch out for is $1.5088 which was a key reaction low

within the bull run higher. The Aussie/Dollar is also close to retesting the crucial support at $0.7530 and with the Kiwi

also having dropped through key support around $0.7200 recently the Aussie will do well to avoid the same fate.

WATCH FOR: The dollar will be running off post-Payrolls sentiment for a couple of days with a lack of key

data in the early part of the week. The big focus will come with US Retail Sales which have been so

disappointing in recent months and hit the dollar hard. Volatility could also be reduced this week without

so much focus on Greece.

EUR/USD

Watch for: Shooting star candle suggests the

euro is under pressure this week

Outlook: Sentiment on the euro has

fluctuated somewhat recently, to say the

least. However the sharp turnaround which

left a high on Thursday at $1.1380 has

changed the outlook to negative for the near

term. With Friday’s strong bearish candle

this puts the bear in control moving into the

new week. The old support around $1.1065

could be pivotal near term though and a

break down could quickly open $1.0900 and

perhaps a retest of the key May low at

$1.0818.

USD/JPY

Watch for: Implied target of 125.70 has been

achieved but the bulls remain in control

Outlook: The breakout above 122.02 implied

an upside target of 125.70 using a range

breakout measurement. This was achieved

in the euphoria of the Payrolls report on

Friday, however there is little to suggest this

should be the end of the run higher.

Momentum indicators are still bullish and

consolidations are being bought into. The

break higher on Friday has also left a strong

150 pip band of support 123.50/125.00 to

work from if there are any early corrections

this week. The trend is your friend for now

on Dollar/Yen with little real resistance the

130 level is not unrealistic if this continues.


FX Outlook

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Indices

Even though there was a lot for equity investors to digest on Friday, the market reaction to the strong payrolls report was

still not great and could tell us something about current market psychology. The best payrolls figure in six months and

the equity markets could barely muster any gains, as investors remain concerned by the Fed moving towards tightening.

Outside of earnings season there is little to drive sentiment outside of economic announcements and speculation on Fed

tightening. This suggests that Wall Street may struggle to make gains in the coming days. As bond yields push higher,

equity markets are suffering. With the yields on the US 10 year Treasury pushing higher, Wall Street has been falling, the

same is also happening on the German DAX. A strong Bund yield equates to selling pressure o the DAX. With volatility

remaining high in the bond markets expect more of the same this week. At least the “will they, won’t they?” with regards

to Greece repaying the IMF can be put to bed for a few days at least and this may mean markets settling down a touch (at

least compared to the high volatility of recent days. The FTSE 100 has been under pressure too as the strong dollar has

dragged on commodity prices (oil and metals) which are still 27% of the index.

WATCH FOR: Movement on bond yields to drive sentiment on the equity markets and without any

significant US data until Thursday, the markets could be moving off technicals early in the week. However,

risk appetite could pick up if Chinese data surprises to the upside. Failing that US retail sales are in focus.

DAX Xetra

Watch for: A confirmed break of support at

11,167 opens the February support band

Outlook: The May low at 11,167 was

breached on Friday and although there was

no closing break to confirm the move, the

downside pressure continues early in the

new week. Momentum indicators suggest

this pressure will continue, with RSI, MACD

and Stochastics all falling in negative

configuration. A closing break on 11,167

would be a 15 week low to open a range of

support 10,550/10,985. A 38.2% Fibonacci

retracement support of the 8355/12,389 bull

run is at 10,848.

FTSE 100

Watch for: The close below 6810 has

opened further corrective pressure

Outlook: The first week of sustained selling

pressure for a couple of months has resulted

in a close below the key May low at 6810.

This is now putting pressure on the medium

term outlook which is also being confirmed

by the momentum indicators with the RSI at

a three month low. There is a band of

support 6694/6765 that now needs to hold

to prevent this decline from really taking

hold. There would now need to be a push

back above the resistance band 6875/6900

to abort the near term corrective force.


INDEX Outlook

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Other Assets: Commodities & Bonds

The strong payrolls data is driving a stronger US dollar and commodity prices have suffered. Both gold and silver continue

to fall away with gold breaking down below the $1170 support to open $1142, whilst silver continues to retreat back

towards the key pivot band support around $15.50. The OPEC meeting showed that the organisation is still intent on

maintaining production levels and that they expected to meet demand. Although this view was broadly expected this is

still slightly supportive as the risk had been that they may have even officially increased production from 30m barrels to

31m per day. Focus instead will on be on a strengthening US dollar which could drive a lower oil price all on its own.

Utterly incredible volatility in the bond markets resulted in 7 month highs on the 10 year yields of both Treasuries and

Bunds. The bund yield has soared as Eurozone inflation ticked higher than expected, whilst Mario Draghi seemed rather

laissez faire with regard to market volatility. If the German 10 year can hold above 0.800% the outlook will continue to

improve. The Greek yield curve remains sharply inverted as yields spiked again on a missed 5th June repayment deadline.

WATCH FOR: Commodity prices are trading with negative correlation to US dollar so all focus is on US data,

with Retail Sales the key announcement. Volatility in bond markets continue to drive general sentiment.

Gold

Watch for: The confirmed breach of

$1178 now opens $1142

Outlook: With three big bearish candles

there has been a two day close below the

old support at $1178 and also

confirmation with an intraday breach of

$1170. This now completes a downside

break from the 10 week range a test of

the key March low at $1142.90 is now on.

In fact the implied target of the range

break is $1132 which is coincidentally also

the key November 2011 low. Momentum

indicators confirm the break and suggest

rallies this week are a chance to sell.

German 10 year Bund yield

Watch for: If yield builds on 0.800% support

the outlook will continue to improve

Outlook: An incredible week for the bund

yield saw the yield double in the space of

four days as it added over 500 ticks. There is

no real sign that the volatility is calming

down yet and there will continue to be great

focus on the direction of the yield (especially

by euro traders). Technically, the breakout

above 0.800% is the key factor to watch now

and holding above this level will open for a

move back towards a test of the 1.00%

psychological resistance again. The medium

term breakout also implies 1.22%. A break

back below the support at 0.680% would see

the bulls lose impetus.


COMMODITIES & BONDS Outlook

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Weekly Outlook 8th June2015


payrolls legacy set to drive a stronger dollar this week

Economy & Finance