Dollar Moves From Range Lows To Highs In Time For NFPs

After last Tuesday’s manufacturing report, dollar bulls were cautiously projecting a similar fate for the ISM service-sector number. The outlook proved prophetic, and the currency is reaping the rewards by pulling up to nearby resistance as the market battens down the hatches for payroll volatility.

Looking over the pertinent dollar pairs, it is obvious that forces in the market are pushing the dollar to the cusp of some attractive technical formations. The EURUSD has officially been challenged with today’s price action and a touch of 1.3550 is clearly the line in the sand for further dollar bidding. The dollar was testing its limits against the British pound by sliding down to 1.9855, though range support around 1.9855/65 is still in place. Having already surpassed the 120 barrier a few days ago, USDJPY is now looking ahead to 122 with a floor forming at previous resistance at 120. Finally, USDCHF has room to move either way. The pair bounced 70 points from recent lows around 1.2090, but serious technical levels are a ways off in each direction.
Only a few weeks ago, the dollar was being driven to record and multi-year lows against its major counterparts. Since then though, bullish sentiment has returned; and today’s ISM report was another piece of the developing rebound. Like the manufacturing survey before, the service-sector report had attached to it a consensus for a modest improvement. And, like the manufacturing number, today’s survey beat expectations. The service sector, which accounts for an estimated 90 percent of the economy, rose to a three-month high in April - with a read of 56.0 for the indicator. From the components, the improvement was clearly evenly spread. New domestic and foreign orders rose, the latter after falling into contractionary territory the month before. At the same time, the employment sub gauge rose from 50.8 to 51.9. The headline rebound comes at an important juncture for growth forecasts as labor trends level off and consumer sentiment deflates. With this indicator backing the improvement in factory activity and capital investment, projections for a second quarter rebound in GDP from four year lows may grow.
Though the ISM report was hogging the spotlight, there were a few other indicators hitting the wires Thursday morning that guide currency traders in the days ahead. Earlier in the morning, readings of first quarter nonfarm productivity and unit labor costs kicked the New York session off with inflation valuations. The labor costs index crossed the ticker at 0.6 percent, far below the fourth quarter’s 6.2 percent pace. At the same time, productivity through the period beat the market’s consensus with a 1.7 percent increase over the fourth quarter. Together, these two indicators suggest the consumer sector’s contribution to overall inflation will abate - and rate hike expectations with it. Making last-minute tweaks to the market’s NFP outlook, initial jobless claims through the week ending April 28th dropped to a three-and-a-half month low 305,000 filings. Before bulls grow too optimistic though, the gauge was in the 340,000 range through the first half of the month; and the less-volatile 4-week moving average has just recently come off of multi-year highs. Now, traders from all markets will take in the ADP survey, ISM employment component numbers and jobless claims to benchmark tomorrow’s release.
A tempered inflation outlook and bolstered service-sector report couldn’t generate gains similar to yesterday’s with a earnings disappointment the size of GM’s crowding out the headlines. By 15:05 GMT, the tech-heavy NASDAQ was the leader of the pack with a 0.38 percent gain bringing the benchmark to 2,567.48. The S&P 500 wasn’t too far behind with a 0.37 percent advance of its own to 1,501.50 though the Dow was straggling with its 0.1 percent crawl to 13,225.69. Without a doubt, the anchor for the Dow was struggling auto-maker General Motors. The firm’s shares sank 4.2 percent to $31.08 after reporting a staggering 90 percent drop in profit due partly to trouble with its GMAC arms subprime exposure. Picking another looser during a green day, Office Max shares plunged 13.3 percent or $6.60 to $42.87 after announcing a rebound in earnings that was far short of the Street’s consensus.
Treasury yields found strength through the pick up in the ISM as expectations of a growth-led rate cut eased. By 15:05 GMT, the benchmark T-note was trading 9/32nds off the open at 99-18 as its yield rose 4 basis points to 4.678. The long-termed bond was quoted 13/32nds lower at 98-18 while its yield advanced 3 basis points to 4.841.