The overnight session was market by very quiet trade as no headlines emerged out of the Eurozone and investors are waiting so see the results of today’s Non Farm Payrolls figures before committing to new positions. Most of the market chatter that has been circulating is focusing on the possibility of central bank intervention in the currency markets, which is something we have been expecting all week. The focus remains on the Japanese Yen and the Swiss Franc, as both currencies are approaching levels where their respective central banks have sought to contain prices through direct intervention.
All of these factors are aligning for what could be a very volatile Friday session if the macro data (the US employment figures) surprise markets to the downside. Historically, the Japanese has the highest correlation with negative risk sentiment but this is also true with the Swiss currency (albeit to a lesser extent).
A negative surprise in today’s employment figures could force the USD/JPY and EUR/CHF lower, reaching the thresholds for both the Swiss and Japanese finance ministry. If this does occur expect violent reversals higher in both currency pairs (potentially as much as a few hundred pips). The key to whether or not this happens will be seen in the strength or weakness of the NFP data. Markets are currently expecting a rise of 140,000jobs for the month of January while the unemployment rate remains steady at 8.5 percent.
European stock markets did manage to see moderate gains (for the fourth day in a row) on some positive M&A news and a slight improvement in the US jobless claims figures. Temenos Group (TEMN) saw gains of 9 percent after British financial software company Misys (MSY) expressed interest in a merger, helping regional stock indices (particularly the Stoxx 600) move higher on the day.
Total gains in the Stoxx 600 were balanced out, however, declines seen in the mining sector (in both Rio Tinto and BHP Billiton, which dropped nearly 2 percent) as investors price in lower demand for mining materials as global growth slows in 2012. The main event risk today for stocks, however, will continue to be the US employment report as there is little expectation for any new market moving headlines out of the Eurozone to close the week.
The USD/JPY has broken lower after forming a short term range with support at 76.70. This break is ominous as we saw a sharp rejection from range resistance and the MACD indicator is once again rolling over into negative territory. Prices remain below their 100 and 200 day moving averages and the lower Bollinger Band is pointed to the downside, so a test of the all time lows at 75.50 looks imminent. Long term, we view this as a low risk, high reward buy position once the downward momentum shifts.
Oil prices are continuing lower along with our bearish call from last week and prices have now clearly broken and closed below key support at 97.50. Prices are currently dealing with the 100 day EMA but our next downside target is the confluence of historical and Fibonacci support seen at 92.30. Preferred sell levels are seen at 97.90, as this was the initial breakdown point and limits upside risk for short positions.