FX Closing Note: Interesting setup ahead of US employment

John J. Hardy, FX Consultant, Saxo Bank

FX Closing Note: Interesting setup ahead of US employment

The US pushed stronger again in today's session, earlier in the day against the JPY, which suddenly turned south after the release of the US weekly initial jobless claims report (which was perfectly in-line and not worthy of much of a reaction, unless the market suddenly thought that the bigger than expected drop in continuing claims was great news for the USD) Before the USDJPY spike, as we mentioned in this morning's report, treasuries had ticked down sharply, which is a pattern that makes sense due to the JPY's negative correlation with interest rates. But later in the day, US treasuries found strong support and rallied back to the top of the range, but this hardly put a dent in the USDJPY rally. Rumors swirled that this might be a sign of intervention, but it could also be a large hand unwinding its position or other heavy market flow in the nervous market ahead of tomorrow's US employment report. Either way, it makes for an interesting technical reversal, as can be seen in the chart below.

Chart: USDJPY
Today's bullish reversal saw the rejection of an attempt at new lows since mid-December. The rally stopped right at the daily Ichimoku cloud, which will be a key resistance as head into tomorrow's US employment report.

As we mentioned earlier in the day, the BoE and ECB meetings were of limited interest to the market for direction. The STIR market tried to react to Trichet's rhetoric, but the March 2011 Euribor contract ended the day only a tick and a half lower, while the US March 2011 Eurodollar was off 5 ticks on the day (perhaps because longs took profits ahead of tomorrow's employment data after this contract saw contract More interestingly, later in the day, the Euro swooned further after Moody's downgraded Deutsche Bank's long term senior debt, suddenly lurching from above 1.3600 to almost 1.3550.

Outside of today ugly Pending Home sales, we had a very positive ICSC Chain Store sales report to add to yesterday's better than expected US ISM non-manufacturing report as evidence that the US recovery may be picking up a bit of speed, if not so much in terms of employment. Let's see if tomorrow's report confirms or refutes that theme.

Looking ahead
Another indecisive day in risk appetite today leaves the markets poised to break either way tomorrow. The setup for the likes of USDJPY (bullish reversal, but still with key resistance in place at around 89.30), AUDUSD (tried recently to cross above that key 0.9040 threshold but so far failed) and EURUSD (bearish rejection today, but found support at very interesting retracement level at 1.3550, which is an interesting 0.618 Fibo retracement level for the wave up from the sub 1.3500 low to yesterday's 1.3736 high.). This all would seem to add up to an either/or outcome at tomorrow's US employment report.