All Eyes Turn To NFP: Will The Dollar Also Turn Lower In H2?

By: Kevin Sollitt

After initial hype, both Chinese abandonment of the peg in perfect synchronization with the much anticipated G-20 meeting in Toronto came and went with little pomp or ceremony.

Last week’s tactics of raising stops on existing long GBP to entry levels paid off nicely as cable continued to rise after acceptance by the market of the budget, as did the suggestion of selling NZD/NOK at an average level of 4.57-see last week’s column for details (CNY Float To Cause Midsummer Madness?).

For those fortunate and/or patient enough to remain long of cable, we advocate a further raising of the stop-loss to 1.4900 and seek a profit objective of 1.5330 on this position. NZD/NOK stop-loss is lowered from 4.68 to 4.62, currently 4.55, and objective 4.30.

In any event exposure should probably be reduced before Friday if no side is triggered to avoid getting stopped out in a fast market.

With that in mind, markets’ attention is now firmly focused on this week’s Non-farm Payrolls, unsurprisingly given recent developments in the US where jobless benefits have been slashed for those out of work for longer than six months and leaving observers wondering from where US economic growth will come.

The USD had a great first half of 2010 not least due to problems in other economies-some commentators prefer to see the USD as the best of a bad bunch given its inherent problems which on reflection may be hard to argue with and in addition provide cause for pause if thinking of buying Dollars here, especially at what are relatively elevated levels given the EUR’s y-t-d 18% fall.

We note the rejection of resistance by the DXY earlier this month just below the psychologically important 90 level which coincided with the EUR hitting the 1.18 handle, albeit briefly as the last selling wave of capitulation concluded.

If (and admittedly it’s a big ‘if’ at this point) the EUR does stabilize, the Dollar may come under some scrutiny as a worthy store of value in the second half of 2010. Not only are new and existing home sales falling due to the expiration of the tax credit, but according to some forecasts 31 of the 50 US States may be technically bankrupt by 2011 given the falling tax revenues due to unemployment and increased spending burdens on top of existing deficits or tight budgets. For the next development in either direction, the catalyst may be a resumption of or retreat from a double-digit unemployment rate, of which we’ll know more on Friday.

FX markets are known to turn on the proverbial dime and therefore another potentially alarming factor for USD bulls could be the recirculation of a theory that the Fed may be about to embark on ‘monster’ money-printing in order to avoid the deflationary scenario that could rear its ugly head and, importantly, one that Bernanke alluded to in his freshman speech as a Fed Governor eight years ago (“Deflation: Making Sure It Doesn’t Happen Here”).

Our view remains just bearish of neutral on the USD until such time as the market decides on the next trend but we think the tide may turn against the USD and allow the EUR for example to recoup some of its losses to around the 1.30 level and cable to 1.60.

Until the numbers are seen we have much to digest this week in the form of UK GDP, the expiration of the ECB’s Long Term Refinancing Operation facility on Thursday and of course whether the SNB decides to show its hand again via intervention.

Meantime our preferred macro currency allocation remains short of USD against NOK, CAD, BRL & HKD, looking to sell ‘risk’ currencies like NZD and AUD on rallies, a tactic we will use until uncertainty is reduced.

Good luck trading.