US Dollar enters freeze period towards Friday's NFP numbers

The US Dollar sinks 2% against the Japanese Yen.
Traders did not find any clues in Challenger Job Cuts or weekly Jobless Claims for NFP.
The US Dollar Index could close above 104.00, on track to return to October levels.

The US Dollar (USD) is facing a blow from the Japanese Yen after Bank of Japan’s (BoJ) Chairman Kazuo Ueda signalled to the markets that a change in monetary policy is coming. The Bank of Japan has kept rates negative for multiple decades, though an end is appearing to be near. The result is that the Japanese Yen is up over 1.25% against the Greenback, which tips the US Dollar Index (DXY) in its turn in the red and snaps this week’s winning streak.

On the economic front, traders remain a bit clueless on what the US Jobs Report will reveal on Friday. It becomes clear though that with the current Challenger Job Cut numbers, the earlier ADP payroll numbers and this weeks Jobless Claims, traders believe that the US Dollar is at a fair value point. Expectations from now on will be a very much sideways regime towards the US Jobs Report print on Friday at 13:30 GMT.

Daily digest: Walk away until NFP

Bank of Japan’s Chairman Kazuo Ueda has hit a nerve in markets in Asian trading hours, after alluding that a change in monetary policy might be at hand in the next central bank rate decision on December 16th. Analysts are expecting that the BoJ might end its decade-long trend of negative rates.
The Challenger Job Cuts were released. Previous was for -36,836 with now -45,510.
Near 13:30 GMT the weekly Jobless Claims were released:
Initial Claims went from 218,000 to 220,000.
Continuing Jobless Claims went from 1,925,000 to 1,816,000.
Wholesale Inventories went from -0.2% to -0.4%.
Consumer Credit Change for October will be released near 20:00 GMT with a previous outstanding credit debt of $9.06 billion. The forecast is for a decrease to $9 billion.
Equities in Asia got hammered in early Thursday trading. Meanwhile the US opening bell is seeing the Nasdaq up over 1% with other US indices following suit.
The CME Group’s FedWatch Tool shows that markets are pricing in a 97.7% chance that the Federal Reserve will keep interest rates unchanged at its meeting next week.
The benchmark 10-year US Treasury Note drops to 4.14%. Yields in Europe, however, are falling even quicker and widening the gap with US Yields.

US Dollar Index technical analysis: Sideways until Friday

The US Dollar retreats firmly this Thursday in early trading, after the BoJ rattled markets with a surprise comment that might mean the end of negative rates on the island. The US Dollar drops over 1% against the Japanese Yen and in its turn is dragging the US Dollar Index (DXY) to the downside. This decline ahead of the US Jobs Report could be the window of opportunity US Dollar bulls are looking for to add to US Dollar positions.

The DXY printed a new third consecutive high on Wednesday, which is what bulls are looking for as confirmation of a winning streak. The DXY could still make it further up, should employment data trigger rising US yields again. A two-tiered pattern of a daily close lower followed by an opening higher would quickly see the DXY back above 104.28, with the 55-day and 100-day Simple Moving Averages (SMA) turned over to support levels.

To the downside, the 200-day SMA should act as support and not allow the DXY to drop below 103.56. If it fails, the lows of June make sense to look for some support near 101.92. Should more events take place that initiate further declines in US rates, expect to see a near-full unwind of the 2023 summer rally, heading to 100.82, followed by 100.00 and 99.41.

Risk sentiment FAQs

What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?

In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.

What are the key assets to track to understand risk sentiment dynamics?

Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.

Which currencies strengthen when sentiment is "risk-on"?

The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.

Which currencies strengthen when sentiment is "risk-off"?

The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.

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