Thursday, February 6, 2014

Currency pairs to watch after Non Farm Payrolls today | A snapshot of the data is not enough

Yesterday was a day of contrasts in the markets. It started with the downbeat tone that has characterised the emerging market currency issues and the turmoil in equities. Later in the day, however, a good initial jobless claims report in the United States, while triggering short covering in the Forex markets as a great many participants had apparently expected a poor outcome, has resulted in a marked change in sentiment. For one thing the DOW Jones Industrial average index was up by a significant amount at the end of the day.

If this marks the end of the transition period between the cheap funds, lower US dollar era that accompanied Quantitative Easing and its end, which is to come about by the end of this year, then many currency pairs would appear to be in a place where they might represent good buying or selling opportunities.

These include, in particular, the Yen (USDJPY pair), which might be in the process of resuming its upward traverse, the Swissie (USDCHF), which was cruelly interrupted yesterday in what seemed like a move upward, Gold, which has been strong of late but which can be expected to fall on the return of calm in emerging and equity markets, and Cable (GBPUSD), which has met a very strong support-turned-resistance level around 1.6346. However, as usual, we will be keeping our powder dry until after the Payrolls report has been digested.

A snapshot of the data is not enough

One of the problems we have is that the markets react to individual reports in the statistics that matter, when the proper way to adjudge these is to look at trends, and the longer the trend is the better. In any exercise in regression, which is the means by which trends are judged as being favourable or not, a whole range of outcomes over time have to be taken into account. Here, there will always be outliers, either to the upside or the downside. It is the cumulative effect that matters.

The Federal Reserve knows this. That is why the seemingly poor Non Farm Payrolls report for December did nothing to reduce their resolve, as the comments of voting and non voting board members alike would seem to indicate, to continue with the elimination of QE on a gradual, but well signalled, basis.

Wednesday January 29th was the most recent Fed day. The final Fed statement of Mr. Bernanke’s term as Fed chair included the following: “Growth in economic activity picked up in recent quarters,” and “Labour market indicators were mixed but on balance showed further improvement.” Appropriately enough, on the following day, January 30th, a decent Year on Year outcome for Gross Domestic Product in the United States came out. This was only one piece of data, but it seems to have fitted with what the Fed was seeing.

Given all of the above, there could be fireworks in store later today when the Non farm Payrolls figures covering January are released. This is because, as of yesterday, a good number is expected. Were this not to materialise, for example because of the severe weather conditions that have been freezing, flooding and battering many parts of the United States in January, and not for reasons of general poor economic growth, then the reaction in the markets to what is only a snapshot of the data, for one short period, will be immediate and harsh.

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