Great Expectations Build for Payrolls, Draghi Dovish

The market didn't even wait for the NFP release to buy dollars after other reports pointed to a solid economy. Several key technical levels broke as the US dollar was the top performer while the Swiss franc lagged. A dearth of economic data in Asia will give the market a chance to consolidate ahead of payrolls.

The ADP jobs report and initial jobless claims were close to expectations and made little impression on markets but a jump in the ISM no n-manufacturing index was a game-changer. The index rose to 58.6 compared to 55.0 expected, the highest since 2011. The employment component also climbed to the highest since February, in a potential precursor to NFP.

The dollar was broadly higher after the day. The bond market took special notice and 10-year US yields rose 10 bps to 2.99%. A break of 3% makes Treasuries especially attractive to Japanese investors who are receiving yields of just 0.78%. Gold also suffered after the data, knocking prices to $1367 from $1395.

The biggest move on the day was a 100-pip fall in EUR/USD during Draghi's press conference. He was unexpectedly dovish and tied it to Fed tapering. The ECB lowered its 2014 growth forecast and said rate cuts were discussed.

Fed tapering threatens to create a virtuous cycle for the dollar. Tapering pushes US rates up and that forces foreign central banks to be dovish. Dislocations in emerging markets result and that also flows into dollars.

Technically, EUR/USD broke the 200-day moving average while USD/JPY broke 100. The moves leave the dollar vulnerable to a disappointing headline from the always-volatile NFP but, ultimately, the Fed has probably seen enough to taper. Even the dovish Kocherlakota said on Thursday that a reduction in Fed bond buying may not mean as much as people might think. It's a signal that the doves won't be fighting hard.