Fundamental Outlook for US Dollar: Bullish

- US Dollar surges as S&P 500 tumbles, risk appetite worsens
- Yet late-week choppiness sees Dollar temper its gains, look forward to next week
- Critical week of forex market event risk may make or break Dollar resurgence

The US Dollar finished almost exactly unchanged against the Euro for the second time in as many weeks, slipping into Friday’s close despite sharp early-week advances. The Greenback nonetheless managed to match its 9-month highs and left its overall recovery intact. Yet the upcoming week promises far more volatility on a good deal of top-tier economic event risk—culminating in the always-market-moving US Nonfarm Payrolls report.

In recent months we have argued that the US Dollar was likely to recover against the Euro and other key counterparts on extremely one-sided bearish positioning and sentiment. Yet the tables have clearly turned in the Dollar’s favor; CFTC Commitment of Traders data shows Non-Commercials at a record net-long the US currency against the Euro. Such one-sided extremes may make it difficult for the Greenback to post substantial gains before a correction, but quite literally anything can happen in what promises to be an exciting week of forex trade.

The first of many tests for the US Dollar will come on Monday’s US Personal Income and Spending data as well as the later-morning ISM Manufacturing survey; large disappointments in either could potentially set the tone for the rest of the week’s trade. Recently-dismal Conference Board Consumer Confidence numbers paint a dreary picture for the future of domestic consumption, but spending and income numbers are forecast to show reasonable gains through the first month of 2010. Consensus expectations likewise point to reasonable strength in ISM Manufacturing data. Suffice it to say, however, lofty expectations beget disappointments and we could see considerable volatility surrounding said event risk.

Markets will subsequently look to Wednesday’s key ADP Employment Change survey data as well as the market-moving ISM Services report. The former is expected to show that private companies shed 10,000 jobs from Payrolls through the month of February—the best such result since January of 2008. Steadily smaller job losses in the ADP report and official Nonfarm Payrolls data leave hope that we may continue to see improvements, but any sizeable declines could easily derail expectations for future recovery. The ISM Services Employment Index will likewise shed light on the state of the jobs market and help foreshadow what we may expect for Friday’s NFP numbers. Said index remains below the expansion/contraction 50.0 mark at 44.0, and it will be critical to see whether conditions improved for the all-important US Services sector.

Finally, the US Nonfarm Payrolls report promises a great deal of volatility not only in the US Dollar, but major financial markets are likely to see sharp price moves on any especially surprising results. It seems that financial markets are at somewhat of a crossroads. On the one hand, relatively steady improvements in economic data suggest that the worst is now past. On the other, heady gains in the S&P 500 and other key financial market risk barometers leave ample room for pullbacks. The week ahead should provide ample clarification on several key themes for the S&P 500 as well as the very highly-correlated US Dollar.

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