December Non-farm Payrolls Preview

Market participants now look ahead to the release of last month’s US monthly job report, in what has already been an incredibly busy start to the new year. For any traders that are looking for a quiet end to a busy week they should know that any large deviations away from the expected increase of 100,000 last month could send markets back into action.

Since the start of the week we have learned that US senate is now Democrat controlled, COVID-19 infection in the United States largest state, California, are rapidly rising, private sector jobs are decreasing, and the FOMC are going to start issuing clearer policy guidance over QE4.

With these factors in mind, the bond market has been a big winner, as traders are starting to factor in lower interest rates for longer and increased fiscal spending under the upcoming Biden administrations tenure.

The US 10-year yield has been on a real tear higher over recent days. When the bond market reacts to economic and political event, traders and investors pay close attention. Typically, the bond market reflects a more accurate picture of the economy than the fx market.

The December Non-farm payrolls job report could cast a shadow over the attempted recovery underway in the US dollar, particularly if it disappoints to the downside. A weak jobs figure would certainly underscore the importance of the Federal Reserve maintaining its current QE4 program.

A negative headline number would almost certainly be a catalyst for a sell-off in the greenback, and a continuation of the bearish trend in the US dollar index. Traders will also be closely looking at the unemployment rate, and indeed the underemployment rate.

The US unemployment is currently 6.7 percent and is expected to remain unchanged tomorrow. Again, plenty of room for downside surprises, if we factor in the recent ADP report, and rising initial and continue jobless claims. The underemployment rate is also sitting around 12 percent and is worth paying attention too.

Going back to initial US jobless claims. The trend has been steadily rising since November, with the December average moving considerably higher. Additionally, this week’s initial jobless number showed a slightly improvement, however, due to the holiday seasonal adjustments also have be factored in.

One thing is for certain at the moment is that US dollar index is becoming a big focus for the market. The index is sitting close to a three-year low, and unless a bullish catalyst comes along the index could be in danger of falling towards the worst of 2014 during the course of this year.

US Dollar Index Technical Analysis

According to the ActivTrader Market Sentiment tool the US dollar index short trade is currently one of the most overcrowded trades at the moment, with over 90 percent of retail traders currently selling the greenback.

This suggests that traders are piling into the US dollar short trades right at multi-years lows, in expectation that the fundamental story of further US dollar weakness will play out.

Due to the trade been so overcrowded, a red flag is being raised that the greenback could see an upside correction. Remember, one the best way to use the market sentiment tool is to look for extreme sentiment amongst retail traders.

Looking at the weekly chart, the 2018 low is really the area to watch. Bears have had plenty of chances to break below this key support area but have so far failed.

Once again, if this key low is broken then the floodgates could open for further US dollar weakness, however, we should remain cautious in case a short-term bounce occurs and catches out the many US dollar shorts.