Fundamental Outlook for US Dollar: Bullish

-    March NFPs turns the US onto a strong pace of growth, but the market’s immediate reaction is tempered by liquidity
-    The Federal Reserve schedules an impromptu meeting to “review” the discount rate
-    EUR/USD finds its way back within congestion. Has the dollar’s bull trend come to an end?

A tentative bullish breakout for the US dollar has been summarily reversed. It is still too early to deem the currency’s pullback a true bear trend as there is a precedence of congestion built up over the past few months for the currency to push through; but the lost potential has certainly undermined the favorable trend that began back in early December. However, the benchmark currency may not be immediately resigned to another extended period of sideways price action. The top event risk of this past week (the non-farm payrolls report) has yet to fully play itself out with the speculative ranks cleared by the market holiday. What’s more, the there was a renewed bearing on investor sentiment this past week that has produced meaningful developments for various benchmarks. What’s more, there is enough scheduled event risk to cause significant problem – especially at the beginning of the week.

When the market’s open back up Monday morning, the first thing that traders will respond to is this past Friday’s employment report. While speculative FX interest was present for the release and the bond market was online, US equities were closed for the Good Friday holiday. What’s more, most of the European markets were also closed, meaning there was virtually no liquidity in the normally active crossover between the New York and London sessions. That being the case, the 162,000-person increase in payrolls (only the second positive number in 27 months and the biggest in three years) would be interpreted as a boost to the relative growth and interest outlook for the United States and thereby assist the dollar. However, this is a warped response to this data. Absent was the presence of the market’s more ‘simple’ asset classes. Had the equities, commodities and futures markets been open for this report, it could have encouraged a surge in risk appetite that relegated the greenback to its status as a safe haven (a weight when sentiment is on the rise). This may still be a viable scenario come Monday given Treasury Secretary Timothy Geithner’s remarks that this data pointed to a “self-sustaining” recovery and the NBER’s (the group responsible for defining the end of the recession) head Robert Hall stating it was a “pretty clear” sign that the recession was over.

If indeed, the risk appetite regains its footing next week, it would extend the progress of a few very notable developments this past week. With a general recovery in investor optimism, the Dow has marched on to 18-month highs, crude oil just recently broke to a 17-month high and the ever-sensitive carry trade has started to revive its bullish bearing.  Yet, this employment report and the round of manufacturing data that bolstered expectations this past week do not exist in a vacuum. There are still credible threats to the market’s tranquility including Greece’s steady descent towards default, the UK’s upcoming election, sovereign credit ratings and stimulus withdrawal. Another concern brought up by the Chinese central bank is the threat of asset bubbles all over the world.

Should a swell in risk appetite be averted (or merely hold off for Monday), the dollar could actually make considerable headway on Monday. Just this past Friday, the Federal Reserve surprised the diluted market when it was announced an emergency meeting to review the discount lending rate was scheduled for April 6th. This heads up is likely an effort to take some of the shock out of a hike to this essential lending rate. And, though it would not represent the same thing as a tightening of the Fed Funds rate, a 25 basis point hike at the discount window would be a strong and definable step for the policy authority to towards the inevitable.

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