Thursday May 5, 2005 - 21:47:00 GMT
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Forex: Dollar Holds Its Breath Ahead of Payrolls
DailyFX Fundamentals 05-05-05
By Kathy Lien, Chief Strategist of www.dailyfx.com
· Dollar Holds Its Breath Ahead of Payrolls
· Pound Unchanged As Market Awaits Election Results
· Yen Rallies With Chinese In Town To Talk To Investors and Bankers
The market is gearing up for tomorrow’s all important non-farm payrolls report. The dollar has rallied against the euro going into the release, with 200k+ being a whisper number that is circulating within the markets. Right now the consensus figure that everyone will be honing in on is 174k, but the estimates range the gamut from a high of 325k to a low of 130k. At this point, it has become a futile effort to try to take a guess at the non-farm payrolls release. Payrolls have fallen short of estimates for three of the past four months. The economic data that we have seen thus far certainly favors an improvement from the disappointing number that we saw in March. The Challenger group reported a sizeable reduction in layoffs while jobless claims have been at a healthy level over the past few weeks - averaging 323k, which is typically consistent with a 200k+ reading. Yet with the employment component of the April ISM survey ticking lower and the awkward timing of Easter in March, statisticians will find it more difficult trying to correctly come up with a guesstimate for the release. According to a recent study that we did on the most market moving indicators for the US dollar, non-farm payrolls topped the list, which means that Friday should be wild-ride for traders who have been aching for volatility a quiet week laden with holidays.
With both French and German markets closed for Ascension Day today, there was no economic data to talk about from the Eurozone. This morning we released our weekly FXCM Speculative Sentiment Index. According to the report, the ratio of longs to shorts in the EURUSD is 1.56, which is within the extreme +/-3 range. After flipping from net long to net shorts last week, the ratio has remained relatively steady. At the time, when the euro was trading at 1.2920, we had said, with the ratio net long and growing, the EURUSD could see a test of the 200-day SMA at 1.2820. The pair did just that, trading just shy of our target to 1.2930. This week, open interest is virtually unchanged with longs simply flipping positions to shorts. Non-farm payrolls due out tomorrow makes it difficult to forecast price action because positions can shift significantly on the back of that release. However, with the ratio still net long, we retain a bearish bias. The 15% increase in shorts though suggests that the pair could rally to 1.3050 before meeting resistance.
With today’s elections under way, the pound has refused to budge out of its 50-pip range against the dollar. Today’s CIPS Services PMI, which fell to 56.5 from 57.0 for March, was fully in line with expectations and failed to generate so much as a stir in the pair. The final results are expected to be announced at 11:30pm BST (6:30pm EDT). Throughout the day, polls have indicated the Labour Party leading with about 38% of the responses as the polling stations close. With markets fully expecting a Blair win, it’s unlikely that we see any significant action stemming from the day’s events. Any movement would come from a shock in the election results, which could include a small victory margin for the Labour Party in terms of parliamentary seats; exit polls are forecasting a 66-seat majority to be won. What would be even more astonishing would be a surprise win by a challenger, such as the Conservatives, who are trailing in the polls at about 33%. Once the outcome is apparent, the market should switch focus to the upcoming rate decision expected to reflect an unaltered rate of 4.75.
The Japanese yen is stronger against the dollar with Chinese central bankers in town to meet New York based bankers, mutual funds and hedge funds. According to a group that is sponsoring a part of the trip, the Chinese is apparently here to discuss what they are doing with their investment community. Yet it seems fishy to us that they have been meeting with Japanese, South Koreans and the US within a relatively short time frame amidst heavy speculation that they are ready for a move. The Chinese definitely seem to be up to something. According to the FXCM SSI report, the ratio of longs to shorts in USDJPY is 2.12, which is within the extreme +/- 3 level. Net longs continue to grow with bulls increasing positions by 26.5%, which is once again at the highest levels on record. As a perfect contrarian indicator, speculators continue to increase longs while USDJPY extends its sell-off. At this rate, unless the ratio flips, the indicator suggests that there is more room for the pair to fall.
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