Daily Report: Massive Carry Trade Unwinding ahead of Non-Farm Payroll

Massive carry trade unwinding occurred overnight following the 344 pts fall in DOW and extended into Asian session with Nikkei down over 300 pts. Markets are increasingly worried on global economic growth. Yen crosses are seen sharply lower, with EUR/JPY pressing 150 level, GBP/JPY taken out 190, and AUD/JPY breached 86. Dollar was boosted by such carry trade unwinding and inflow of funds despite pessimistic comments from Fed Fisher and Yellen. Fisher said that it is "very likely we will suffer anemic growth for the current and perhaps the next couple of quarters." He also warned slowing growth might not moderate inflation into 2009. Yellen on the other hand expects expects growth in the second half of 2008 to be "decidedly subpar," though she sees inflation risks as being "diminished."

Focus now turns to Non Farm Payroll report today which is expected to show the eighth consecutive month of contraction by -75k in Aug. Unemployment rate is expected to be unchanged at 5.7%. Leading indicators for NFP are mostly negative with employment component of ISM Services dipping deeper into contraction region at 45.4 while that of ISM manufacturing also dropped below 50 to 49.7. ADP employment showed -33k contraction. Challenger report showed layoffs increased by 11.7%. It's hard to expect any upside surprise in the NFP. Canadian job report will also catch much attention and is expected to recover mildly by growing 8k in Aug. But unemployment rates is expected to climb further from 6.1% to 6.2%.

After all, the reactions to data remains tricky and the dominate force in the fx markets is still carry trades and commodity prices. A poor NFP data today may not be dollar negative as yen buying could indeed help the greenback like it does recently. So, traders are advised to pay close attention to the stocks and commodities before placing their bets on FX.

EUR/JPY Daily Outlook

Daily Pivots: (S1) 151.82; (P) 154.79; (R1) 156.32; More.

EUR/JPY's decline extends further as expected as accelerated to as low as 150.59 so far. Some support is seen as EUR/JPY entered into key medium term support zone of 149.27/151.71 as the cross turns sideway. Nevertheless, intraday bias remains on the downside for 149.27. Above 1.5437 will turn intraday outlook neutral first but recovery should be limited below 157.83 resistance and bring another fall. Above 157.83 is needed to signal a short term bottom is formed.

In the bigger picture, EUR/JPY is now sitting in key medium term support zone of 149.27/151.71. As discussed before, recent developments argues that a long term top is already in place at 169.96 after EUR/JPY failed 170 psychological level. Bearish divergence conditions in weekly MACD and RSI and with monthly MACD remains below signal line support this. This week's sharp break of long term rising channel support adds much more credence to this case. Decisive break of 149.27 support will confirm and bring deeper medium term decline to next support zone at 124.15/140.92. Note that some rebound might be seen with 55 months EMA (now at 149.79) in proximity but, above 170 psychological resistance is now needed to confirm underlying momentum. Otherwise, downside risks will continue to grow.

Forex News Digest

• Study Says U.S. "Housing 'Bubble' Has Popped"
• Japanese Capital Spending Dips Lower Than Forecasted
• The Day Ahead Canada and U.S.: US Nonfarm Payrolls, Canada's Unemployment Rate
• The Day Ahead Europe and UK: ECB Speak, German Industrial Production
• Fed Funds Futures Increase Rate Hold Expectations After Fed Yellen's Comment
• Thursday's News Recap: US ISM Services Above 50, ADP in Line, Yellen on Rates
• U.S. Preview: BLS Payrolls Expected to Decline for Eighth Month, -75k Consensus
• CA Preview: July Job Losses Not Expected to Be Repeated in August
• Euro Slides to 11-Month Low Against the Dollar on Recession Speculation
• Australia, N.Z. Dollars Slump to 2-Year Lows Versus Yen as Commodities Dip
• U.S. Probably Lost Jobs for an Eighth Month; Jobless Rate Forecast at 5.7%
• Euro May Extend Decline to $1.3355 on Technical Charts, Citigroup Says
• Pound Set for Weekly Decline Versus Euro, Dollar as BOE Keeps Rate on Hold

More Forex News

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