Foreign-exchange markets aren't pricing in enough downside risk ahead of Friday's nonfarm payrolls report after Federal Reserve Vice Chairman Stanley Fischer specifically called out that report as key in the Fed's decision-making, when he spoke at Jackson Hole last week.
Fischer said on Friday that the jobs data will weigh on the Fed's decision about whether to increase rates at their September meeting, which traders took to mean the central bank is itching to hike. Fischer backed that up by noting the monthly numbers have been strong recently as well.
There's no guarantee the payrolls report will give the Fed a green light, even as markets now see a 44 percent chance they'll go in September, according to data compiled by Bloomberg. In fact, there's a decent chance investors will pare positions, as they often do ahead of major events, which could mean the U.S. dollar's gains fade into losses.
In particular, the Australian and New Zealand dollars could be poised to recoup some of the ground lost during Jackson Hole.
The Kiwi remains in an upward-sloping bull channel versus the U.S. dollar that will only begin to be compromised with a close below 0.7200. It currently enjoys a 68 bps premium to Treasury 10-year yields despite Fed rate hike fears. An advance and close above 0.7291, standard deviation support/resistance should restore confidence in the uptrend.
The Aussie has a bit of work to do to re-establish an uptrend, needing a close versus the U.S. dollar above 0.7630 to regain its upward-sloping bull trend channel. It has support at its 50-day moving average 0.7561 and 100-DMA 0.7500.
There's also a chance the U.S. dollar continues to trip stops, as the market isn't positioned long so there could be room to run, a trader in New York said.
Even if so, traders would be well-advised to check their risk levels, and make sure they aren't too exposed on the chance that this report doesn't deliver the thumbs-up for the rate hike that the markets think it will.
Note: Vincent Cignarella is an FX strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.