FOREX: Dollar Pullback Encouraged by Follow Risk Appetite Rally, What should we Expect from NFPs?

Dollar Pullback Encouraged by Follow Risk Appetite Rally, What should we Expect from NFPs? Euro: A Divergence between EURUSD and EURCHF Shows there is Something Amiss Post-ECB Canadian Dollar Surges ahead of its own Important Employment Data, US Jobs Figures British Pound: The Sterling Plunges against High Yield and Safe Haven Currency Alike Swiss Franc Advances after 3Q GDP Figures Meet Expectations, Boost Rate Speculation Australian Dollar's Reaction to Risk Trends Dampened by Poor Retail Sales Showing Dollar Pullback Encouraged by Follow Risk Appetite Rally, What should we Expect from NFPs? A single, daily correction can easily be written off as a necessary breather from a prominent trend; but back-to-back declines starts to look like the foundation for a reversal. The benchmark dollar put in for its second bearish performance Thursday; and the question of whether this current bearing is merely a temporary pullback or meaningful reversal has instantly become more difficult to answer. Between the currency's two most prominent catalysts (the euro's health and risk appetite trends), one would temper its influence while the other easily compensated. Assessing the greenback's bearings from here is largely a question of fundamental influence; but there is also a market-flows component to its intermediate behavior. Looking to the trade-weighted Dollar Index, it is worth noting that the serial declines mark the most aggressive decline since the currency bottomed after the Fed announced its second stimulus program back on November 4th. That said, the retracement to this point is only a fifth of the initial run up through November. Given pace and current standings, the absence of a firm catalyst could easily leave the dollar open to unwinding of long positions. Amongst the majors, we can see the greenback's performance has progressed at different rates. USDCAD was without doubt the most dramatic performer - fitting given tomorrow's event risk. From there, the high yield for the Australian dollar and direct contrast of the euro leveraged the currency. And, interestingly enough, GBPUSD, USDJPY and USDCHF have been far more reserved. Collectively, the dollar has plenty of room to fall off; and this will be the market's naturally inclination if the currency's favored fundamental drivers don't revive their support of safe haven flows. The most immediate disconnect for dollar buying has come via the break in fear of an escalating European financial crisis. The impact this has on sentiment is almost as influential as the natural flow of speculative capital out of European assets into the world's most liquid markets. However, the euro's troubles are not over – they have simply come to a temporary balance. From the ECB's rate decision, there was little to really derive optimism from. On a relative basis and given expectations heading into the event, the central bank fell well short of stemming the bleeding. Another jolting develop from within Europe's boarder can quickly revive EURUSD selling pressure (more on that below); but so too can general risk appetite trends return the focus to the region's troubles. It seems a chicken-and-the-egg situation between fear igniting European troubles and vice versa; but sentiment is open to many catalysts. With the S&P 500 just off a two-year high, there is a natural inclination for risk appetite to maintain its climb. It is against this proclivity that the upcoming NFPs will be judged against. If we were to assess the influence that this monthly jobs figure really has on the outlook for economic health and market stability, it ultimately carries little weight. It is a common belief that the US economy is recovering but at a slow clip. And, with many months of large net job increases before the economy is back up to speed; there is little to draw from this data. However, it is also a shared belief that this particular indicator is a major market mover. Therefore, traders will react. If the data comes out better than expected, it will likely fit the prevailing bullish trend nicely. Alternatively, a disappointment will struggle to do more than curb the advance. Euro: A Divergence between EURUSD and EURCHF Shows there is Something Amiss Post-ECB Has Europe's financial future immediately improved after the ECB rate decision Thursday? It would seem that way if were to just refer to EURUSD. However, there is an element of risk appetite that goes beyond the region's fundamental situation. Looking at EURCHF, we can see the true disappointment in the results. With European governments struggling to smother crises in their individual economies and against the backdrop of a liberal Federal Reserve; traders expected the ECB to step up its support of the region. Instead, they simply expanded their existing liquidity program through the first quarter. This falls far short; but unclaimed government bond purchases may help in the background. Canadian Dollar Surges ahead of its own Important Employment Data, US Jobs Figures If we are looking for potential volatility through the final 12 hours of the trading, the best bet is with USDCAD. Not only is this pair obliged to respond to the US non-farm payrolls; but the Canadian employment statistics are due as well. For the greatest impact on this particular pair (and perhaps a break below parity), strong NFPs will stoke risk appetite (weigh the dollar) and strong Canadian figures will boost the loonie. British Pound: The Sterling Plunges against High Yield and Safe Haven Currency Alike It is hard to miss the disappointing performance of the sterling. It is reasonable to expect the drop against high yield currencies as risk appetite was the primary driver for the day and the European connection provided little support. That said, the currency dropped against the yen and even held against the dollar. We could say it was the construction data; but that would be reaching. There are long-term concerns here. Swiss Franc Advances after 3Q GDP Figures Meet Expectations, Boost Rate Speculation The franc has a natural catalyst in its financial connections to the euro: when savings flee European banks, it naturally heads towards Swiss accounts. However, this safe haven aspect aside, the currency actually far more comparable to a yield currency. While its rate is low now, expectations for rate hikes are rising quickly. Thursday's strong 0.7 percent 3Q growth reading certainly helped this belief along. Australian Dollar's Reaction to Risk Trends Dampened by Poor Retail Sales Showing Risk appetite was up Thursday and that certainly helped the major with the high yield. However, it is worth noting that the currency's performance against the Canadian and New Zealand dollars are notable slack. Though the currency currently maintains the highest return; its outlook for further expansion on that yield differential is tempering with data like the biggest drop in retail sales since July of last year. For Real Time Forex News, visit: http://www.dailyfx.com/real_time_news/