USD has lost its upside momentum against most major currencies - BBH

Analysts at BBH explains that after a strong ADP jobs report (298k), everyone recognizes upside risk to today's national report, and the dollar has lost its upside momentum against most major currencies except the Japanese yen.

Key Quotes

“Many seem to recognize the risks of long dollar positions today.  There are three sets of possibilities.  First, the US jobs report is seen as strong, and the dollar sells off, as last week on “buy the rumor, sell the fact” activity.  Second, the jobs report could be strong, and the market sees the pace of Fed tightening accelerating, and the dollar rallies.  Third, the jobs report could be disappointing, and the dollar sells off.  In two of the three scenarios, the dollar weakens.”   

“On the other hand, what is different now compared with last week is that the dollar is softer before the event.  The US dollar's momentum stalled yesterday, helped by a bout of euro short covering that helped trigger a broader short-covering advance in many of the major currencies.  The spark came from the ECB's Draghi, who made it clear that the central bank's risk assessment was shifting toward a more balanced view as the downside risks eased.  Nevertheless, the fact that the staff's forecast that inflation next year will be lower than this year warns against over-emphasizing a subtle change in signaling.”   

“While we recognize the dollar has scope to weaken a bit more, we suspect it will not be a repeat of last week.  Those that want to pick a near-term dollar top may be reluctant to make much of stand when it may be easier to do so after next week's FOMC meeting.  This view still can see the euro moving toward $1.0640-$1.0680, and sterling testing the $1.22 area.  The Australian dollar can push toward $0.7545-$0.7560, while the US dollar can ease back to the CAD1.3430-CAD1.3450 area.  Such price action would leave the technical tone intact.”   

“In summary, look for next week's events (FOMC meeting, Dutch election, and G20 meeting) to limit the dollar's downside, barring a significant disappointment that makes participants doubt the certainty of a hike next week.  Rather than a repeat of last week’s “buy the rumor, sell the fact”, we suspect the opposite will happen, with most of the dollar's decline already likely seen since yesterday's ECB meeting.  The two weeks of rising US yields (a tenth day of rising 10-year yields would be longest such streak since the mid-1970s) warns of a potential turning point in the market.”