Interesting price action in the currency markets during the last 24 hours ahead of the US Non-Farm Payrolls report that is scheduled to be released today. What attracted our attention in the way the major currency instruments traded yesterday was a further weakness from the US Dollar a day before the release of the market-moving US jobs report. One could suppose that the way the Dollar retreated against its major counterparties would suggest that market participants are expecting a weak performance from the labour market in the US for the past month.
However we believe that Dollar’s performance is attributed to a less simple explanation that this and one should also take into consideration the timing of the retreat. With today being Good Friday which means that most markets are closed for a holiday today and on Monday and many people away from their desks for the long weekend there is an ingredient of risk aversion in the reasons that drove the Dollar lower.
We know that investors are mainly positioned in favour of the US currency so taking a step back and closing or hedging a portion of their pro-Dollar positions would only be natural since they will be gone from their trading desks for the next 4 days. So it becomes clearer that yesterday’s reaction should be interpreted as a lack of confidence over the performance of the US jobs market.
At the same time the indications we use to assume whether we should expect a strong or a weak NFP release are mixed so all bets are off and this also supports why market participants preferred to scale back their Dollar bets – they simply preferred to remain neutral at this time.
The Euro and the Cable both benefited from this development with the Single currency recording strong gains but the UK currency remained capped within its recent range. The Euro traded shy of the 1.0900 barrier and further weakness from the Dollar could allow it to continue towards the 1.1000 area at this time. On the other hand a strong NFP reading would pressure the Single currency back around the 1.0800 floor.
The Cable remains capped between 1.4750 and 1.4850 but we believe that the US jobs report has the potential to drive the UK currency out of this range. A potential Dollar weakness should drive the Cable towards the 1.4950 level while a strong NFP release could send it towards the 1.4700 area. With the Cable being stuck in this range for so long it will be very interesting to see what kind of support there is behind the currency, especially with only a month left before the UK elections.
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