A scary day for the US dollar

6 January, 2017

It was the first day of a true correction on the US dollar since Donald Trump won presidency in the US. Looking at the EURUSD a body of the USD-negative daily candle is the largest since December 5th (a day after the Italian referendum when markets took a not-the-worst outcome as a relief) but in case of the USDJPY it’s the largest since July 29th. A sell-off a the greenback is broad-based with currencies like the CAD or the AUD making significant gains as well.

There are two reasons behind this state of affair. One is a relatively soft streak of the labour market figures. The ADP report came out below the consensus at +153k. While this is not a tragedy, combined with a lower subindex from the ISM services report, the data points to a downbeat NFP figure tomorrow, at least when it comes to employment change. To be sure, we cannot say  the US data today was bad. Actually the ISM as a whole was above the consensus as it remained at a solid 57.2 pts. level. Initial claims moved down again as well. However, investors might be preparing for a somewhat disappointing NFP report and adjust their positioning accordingly.    

Which takes us to the second reason which is positioning. The USD has been stretched as we have not seen any substantial correction for a long time. Therefore the bar goes higher and higher and while we’ve seen investors unwilling to react to very strong data (like the manufacturing ISM on Tuesday), mixed data caused profit-taking.

Having that said, the USD retains its mid-term potential in our view. As we suggested in our NFP preview, the exact employment number is not longer that important for as long as it’s broadly around the consensus. Wage dynamics will be more relevant now as will an overall data picture which so far has been strong. Therefore this profit-taking may actually be a decent USD buying opportunity at the end of the day.

Elsewhere, we’ve seen some volatility on the oil market. Oil keeps advancing today but the moves have been trimmed following the DOE report which showed a significant decline in oil inventories that was - however - dwarfed by giant build of product inventories making the overall report oil-negative.

Friday is mostly about the NFP  but do not miss the data flow from Canada with the local NFP scheduled ahead of the PMI release. Both NFPs will be released at 1.30pm GMT. 

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