The greenback was weaker at the close of North American trade on Thursday with the Dow Jones FXCM Dollar Index (Ticker: USDollar) sliding 0.49% on the session. Equity markets rallied on a flurry of reports out of Greece that Prime Minister George Papandreou and the opposition party were in negotiations after canceling a planned referendum on the terms of the newly proposed EU bailout package and Euro membership. European markets were markedly higher on the news with US markets following suite. The Dow, the S&P, and the NASDAQ closed just off session highs with an advance of 1.76%, 1.88%, and 2.20% respectively. While investors await further developments out of the region, all eyes now turn to tomorrow’s non-farm payroll report as domestic affairs come back into focus after yesterday’s FOMC press conference where Chairman Bernanke cited expectations for a “frustratingly slow” recovery in the jobs market.
The ECB surprised markets with a 25basis cut citing concerns over future growth prospects with the newly-minted President Mario Draghi stating that Europe is likely to experience a “mild recession,” in coming months. Despite Draghi’s increasingly dovish tone, markets found solace later in the day when newswires reported that Papandreou had called off the referendum. The situation in Europe remains fragile with today’s dollar losses lacking much conviction ahead of key employment data tomorrow.
The dollar failed a third attempt at a breach above 9800 before easing back below the 38.2% Fibonacci extension taken from the June 2010 and November 2010 crests at 9745 by the close of trade. The index closed below the 20 and 50-day moving averages and the greenback may yet see further losses with no significant support in view until 9563. In the interim however, expect the dollar to hold its recent range ahead of key event risk tomorrow.
An hourly chart shows the index taking a steep dive after testing 9800 before breaking below the 50% Fibonacci retracement taken from the August 1st advance at 9730. The dollar closed just below former soft support at 9700 with subsequent floors seen lower at the 61.8% retracement at 9633 and 9600. Topside resistance now stands at 9745 backed by 9800 and the 38.2% retracement 9825.
The greenback fell against three of the four component currencies highlighted by a 0.65% decline against the Australian dollar. As the highest yielding currency out of the developed economies the aussie continues to be the chief beneficiary of risk-on flows. Note that the risk currencies are still considerably down against the dollar for the week after the massive risk sell-off seen on Monday and Tuesday. The yen was the only component currency to slide against the greenback with the USD/JPY continuing to hold an incredibly tight range since Sunday’s surprise intervention.
Although the non-farm payroll report is typically the single largest market moving event, Friday's print may not spark the type of volatility we would normally expect. With Bernanke recently re-affirming expectations for a prolonged and sluggish recovery a print of 100K or so would do little to effectively reduce the unemployment rate and it seems market participants are unlikely to be wavered unless there is a substantial miss on the data. A swing above 120K or below 80K is likely to spark a surge in volatility with a weaker print likely to weigh on the greenback as traders begin to factor in the possibility of further easing form the Fed. As it stands consensus estimates are calling for a print of 95K, slightly weaker than last month’s read of 103K. Although stronger print is likely to support risk, the dollar may find some support as the domestic outlook improves.
Michael Boutros, Currency Analyst for DailyFX.com is a Technical/Fundamental Analyst specializing in the FX markets. E-mail: firstname.lastname@example.org.