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FXPRIMUS Market Brief of the Week: Dollar Strengthening in 2014 Looks Inevitable

SINGAPORE, SINGAPORE -- (Marketwired) -- 02/05/14 -- In FXPRIMUS' Market Brief of The Week for 3 February, the brokerage firm's Senior Economist, Jimmy Zhu, discusses the Dollar's performance.

Economic Insights

Dollar Almost Outperformed All G10 Currencies Despite Concerns for U.S. Labour Market

In the first month of 2014, U.S. Dollar remains on the strong side, nearly outperforming all G10 currencies except for the Yen. Although consensus is to reduce monthly purchases by USD 10 billion in every Federal Open Market Committee (FOMC) meeting, it is still data dependent and not a pre-set course, according to the Federal Reserve (Fed).

It is a heavy week amid the global central banks' meeting and some top tier data from the U.S., such as Non-Farm Payroll (NFP) and Institute for Supply Management (ISM) manufacturing Purchasing Managers' Index (PMI). The market is keen to know whether the soft release of December's payrolls was due to bad weather, or economic downturn. We do see some uncertainties on possible decline here because durable orders and housing data released earlier suggested another possible soft print. Another key issue will be that the change in payrolls is inconsistent with last month's 6.7% falling unemployment rate. A 35-year low labour market participating rate suggested that increasing amount of people has left the labour force.

As we mentioned few times this year, where is the correlation in the near term? Our advice will be a "risk off" model until next payrolls data returns to resilience. You can see equities selling off, USD and U.S. Treasuries rallied, clearly suggesting that traders are looking at safer assets for this stage. For currency traders, they only wonder about the USD direction if U.S. economic data rebounds in later days. In our view, the direction should still have upside bias. Capital flows into the U.S. are likely to continue regardless of market scenario or risk sentiment. The only question is whether capital will flow into riskier equities or safer Treasury bills. Either will result in further strengthening of the Greenback. Even a catastrophe in the U.S. (a much worse economic condition than now) may boost both the Dollar and U.S. Treasury bills, judging from previous market scenarios, such as the U.S. debt-ceiling debates and sovereign credit-rating downgrade by Standard & Poor's in 2011.

U.S. 10-Year notes March Future (white) vs. S&P 500 (yellow) last month

To view the figure associated with this press release, please visit the following link: http://media3.marketwire.com/docs/fxpr02051.jpg

Source: Bloomberg

Still, demand in global economy remains lacklustre which suggested safe haven assets might be in traders' favour before future catalysts appear. China's States manufacturing PMI fell to 50.5 last month, confirming HSBC's survey that economy growth has reached the peak.

Various central banks will meet this week, including the Reserve Bank of Australia (RBA), Bank of England (BoE) and European Central Bank (ECB). Among all, ECB could gain the most attraction as investors are keen to learn further of ECB's monetary policy. Mario Draghi said in Davos 2014 conference that the bank was ready to act if necessary, but he insisted that deflation was not yet an issue for the Euro Zone. The message hinted that an immediate rate cut is unlikely, thus the attention will be its press conference this Thursday. In the coming few months, we expect ECB to be as dovish as they can. According to current data, Euro Zone inflation is subdued, and expected to remain subdued in 2014. The longer it stays at a low level, the more serious the risk of deflation. The central bank shall seek its available tools to reverse the scenario, such as Long-Term Refinancing Operations (LTRO), Funding Lending Scheme loans, or even U.S. Style Quantitative Easing (QE). For the RBA, we do not expect it to lower the Official Cash Rate (OCR) by another 25 bps since the central bank has raised caution of rising prices in the property market. But Aussie dollar downside risk remains as the central bank may continue its verbal intervention such as "a comfortable level at 0.85 or 0.80 for the AUDUSD".

Top News This Week

U.S. Non-Farm Payroll
I expect figures to come in at 125K

RBA Cash Rate decision
I expect figures to come in at 2.5% unchanged

ECB main refinancing rate decision
I expect figures to come in at 0.25% unchanged

Trade Recommendation

AUDUSD - Short at 0.8780

AUDUSD retains its downside bias due to the Chinese economy weakening and "RBA's 0.85 bias". Based on the recent price reaction, most of the price rebound is due to technical factors, instead of fundamentals factors. Thus, the pressure remains on the downside.

Based on the H1 chart, we see some resistance level around the level of 0.8780, and we will short this pair if the price rebounds to this level.

Entry Price - 0.8780
Stop Loss - 0.8830
1st Target Price - 0.8730
2nd Target price - 0.8680

To view the figure associated with this press release, please visit the following link: http://media3.marketwire.com/docs/fxpr02052.jpg

Source: Bloomberg, AUDUSD H1 Chart

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