Dollar index susceptible to Friday`s NFP

Dollar index susceptible to Friday`s NFP

By: Darryl Frankfort | Where To Trade | On:2-10-2014 12:32
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key Highlights

  • Dollar index reached fresh yearly highs on Wednesday
  • Weaker ISM manufacturing figures caused correction
  • Weaker construction spending in the US
  • Higher than expected ADP employment figures
  • What’s ahead for the Non-farm Payroll employment change

The dollar has been on a bullish streak as the economic outlook for the US looks ever more promising. The dollar index has gained over 6.4% and reached a high of 86.2018 on Wednesday. Against the Yen (JPY), the dollar touched the 110 major levels a level we had last seen in 2008.

A Strong US GDP report at the end of the third quarter showed that the economy bounced back from -2.1% (negative 2.1%) decline in the first quarter to a 4.6 growth. This has reinforced a the positive outlook for the dollar and pushed the dollar against other major currencies

USDX 1H

 

After weaker than expected ISM manufacturing reading was released on Wednesday, the dollar corrected to 85.5013 in the dollar index to and 108.55 against the Yen. ISM Manufacturing for September was reported at 56.6 against an expectation of 58.5. This represents a 0.8% drop from the report released in august at 59%. This August ISM manufacturing of 59 was the peak for the seven preceding quarters.

The ADP Employment report showed a change of 213K jobs in September. This is significantly above the expected change of 205K. It represents a 5% increase from 202K reported for August. It sets our expectation on what to expect on the employment report tomorrow.

Clues on Non-Farm payroll change

Historically there is a high correlation between ADP employment figures and the official figures released by the Bureau of Labor Statistics.  A positive figure in the ADP usually results in a similarly positive figure in the official figures. We can thus expect a positive figure for NFP o Friday based on the expectations set by the ADP report. Experts forecast the NFP to be at 218K, we anticipate a number at this figure or above.

 A lower than 218K figure will be a shock to the markets and may stall the USD bullish rally in the medium term. Based on yesterday’s correction, even though quite limited, expectation for the dollar in the short term is already neutral any negative news will see a significant pull back from the uptrend.

On the other hand a figure significantly above 218K will fuel the bullish pressure.  And push the Dollar index above 86.2 levels.

Weak construction spending will potentially dampen the bulls. Construction spending has been lower each month for the last three months. Technical factors including the expected correction of exchange prices in the short term makes the case for the importance of keeping an eye on the Bureau’s employment report. Even though the longer term uptrend is expected to continue well into 2015 Q2, we could see a major correction based on bearish fundamental news.

Wrap up

The dollar is backed by strong bullish sentiments and expectation for the USDX is to see it well above its present levels. However technical factors are likely to contribute to a major pull back from the uptrend in the medium term and short term.

Because of the expectation of a pull back any bearish economic news may act as a trigger. Even though the US economy is performing well, there is bound to be hiccups and uneven rates of growth in different sectors. We anticipate seeing the impact of these hiccups on the dollar index and its exchange rates in the forex market. On Friday’s NFP however, we anticipate a better than expected figure based on the ADP figures. An excellent trading approach under these expected conditions is to go long the USDJPY or short the EURUSD if the figure is significantly better than expected.

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