Fundamental Forecast for Dollar: Bullish
US Nonfarm Payrolls report beats all expectations, sends US Dollar higher
A sharply better-than-expected US Nonfarm Payrolls report helped push the Dollar positive for the first time in the past six weeks. Yet a virtually empty US economic calendar leaves little hope of big moves in the week ahead. And indeed, 1-week Euro/US Dollar volatility expectations finished at record lows following the Nonfarm Payrolls report. Clearly most are betting on/hedging against extremely slow moves ahead, but why didn’t NFPs change that?
The US labor market data was about as strong as anyone could have hoped
for, and strong employment growth should force the US Federal Reserve
to tighten monetary policy more quickly than expected. Yet there needs
to be more for markets to start pricing in Fed rate hikes. The US
2-year Treasury Yield—a great proxy for medium-term interest rate
expectations—spiked on the NFPs report only to fall short at the
09/2013 high and likely stick to its long-standing trading range.
Where might we see bigger currency volatility? Follow the interest
rates. The British Pound is an obvious candidate as it trades at
post-financial crisis highs, and it should be little surprise to note
that UK government bond yields trade at fresh multi-year peaks.
The Euro should arguably be more sensitive to the fact that the
European Central Bank has cut benchmark deposit rates into negative
territory. Yet Euro Zone yields were already trading near zero percent
even before recent ECB actions. Interest rate expectations remain muted
in the US, Euro Zone, and across G10 currencies.
Thus if you can’t beat them, join them. It might be frustrating to
trade in such low-volatility market conditions, but our real client data actually shows that most tend to do well in tight ranges.
There’s little sense in trading for big currency swings if market
conditions remain as they are, and the fact that the US Dollar remains
oversold against key counterparts and that in itself leaves us focused
on USD gains in the week and month ahead.
