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Euro, Pound Firm Ahead of NFP -Will Risk Rally?

Last updated 11/6/2009 5:01 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• RBA upgrades assesment of economic activity in 2010
• NFP - key release for the week -200K, 10% unemployment pivot points
• Asia up on DJIA follow through, Europe slightly bid
• OIl back above $80/bbl
• Gold at $1093/oz as $1100 remains unbreached

Overnight Eco

• AUD AIG Construction Index 50.9 vs, 50.8
• GBP NIESR GDP Estimate -0.4%
• JPY Leading Indicators 84.6%
• CHF Unemployment Rate 4.1% vs 4.2% forecast
• GBP PPI output weaker at 0.2% vs. 0.4% eyed
• EUR German Factory Orders n/a

Event Risk on Tap

• CAD Employment Change expected at 10.3K
• CAD Unemployment Rate expected at 8.4%
• USD Non-Farm Employment Change expected at -173K
• USD Unemployment Rate expected at 9.9%
• USD Average Hourly Earnings expected at 0.1%

Price Action

• USD/JPY trades down to 90.50 as dollar selling comes in ahead of NFP
• AUD/USD propped to 91.70 on bullish RBA comments
• GBP/USD above 1.6600 as traders front run NFP
• EUR/USD takes out 1.4900 on dollar supply ahead of employment

A generally subdued night in the currency markets but the pre positioning ahead of the NFP report suggests that FX traders are following their equity colleagues by remaining long risk as EUR/USD tested the 1.4900 level and GBP/USD rose above 1.6600. Overall however the price  action was typically lackluster in front of the marquee event of the week especially with little other econ data on the global calendar.

One note of interest was the quarterly monetary report from the Reserve Bank of Australia which stated that “A further gradual lessening of monetary stimulus is likely to be required over time.”  The RBA went on to note that, “Given the resilience of the economy, GDP is now expected to increase by a little more than  2 per cent over the year to mid  2010, a considerably better outcome than thought likely earlier in the year. The central forecast is then for the economy to expand by 3¼ per cent over the year to mid 2011.. The outlook for Australia’s terms of trade has also improved, with some increase now expected over the next year or so. The various fiscal stimulus measures are also likely to continue to support the level of GDP in 2010.”

The bullish assessment from the RBA suggests that barring a sudden contraction in global demand , it will continue to ratchet up  rates in the  first two month of next year putting Aussie firmly on a path to parity with the greenback as interest differentials widen out. As we wrote earlier in the week, the Aussie may also see a side benefit from the rising gold prices especially if the precious metal crosses the key $1100/oz. mark.

Meanwhile in UK the PPI data proved mixed with PPI input rising  2.6% from 1.6% eyed, but the output PPI increasing only a modest 0.2% versus forecasts of  0.4%. Te lack of pricing power suggests that  end demand remains tepid, but the news had virtually no impact on sterling as traders set their focus on NFP.

In our preview of the employment report we noted that the leading data points were mixed, albeit perhaps slightly skewing towards an upside surprise. We believe  the key barriers will be -200K and 10% unemployment with readings exceeding those barriers likely to be negative for the risk trade. As usual the first reaction to the data is very susceptible to a reversal - if the data prints better than forecast the dollar may rally on the assumption of stronger US growth going forward. Ultimately however, if US labor markets show clear evidence of  improvement we believe the risk trade will continue to perform as currency traders focus on the prospect of rising yields from high beta FX.   

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.