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UK PMI Provides A Boost to Risk FX Ahead of NFP

Last updated 2/3/2012 5:31 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• UK Services PMI beats big at 56 vs. 53 eyed
• Germany opposes any ECB haircuts of Greek debt
• Nikkei -0.51% Europe flat
• Oil at $96.62/bbl
• Gold at $1765/oz.

Overnight Eco

• AUD AiG Performance of Services Index (Jan) 51.9 vs. 49.0
• EUR EU Purchasing Manager Index Services (Jan) 50.4 vs. 50.5
• EUR EMU Retail Sales (MoM) (Dec) -0.3% vs. 0.4%
• GBP Purchasing Manager Index Services (Jan) 56.0 vs. 53.5

Event Risk on Tap

• USD Nonfarm Payrolls (Jan) expected at 150K
• USD Unemployment Rate (Jan) expected at 8.5%
• USD Average Hourly Earnings (MoM) (Jan) expected at 0.2%
• USD Factory Orders (MoM) (Dec) expected at 1.2%
• USD ISM Non-Manufacturing (Jan) expected at 53.3
• CAD Net Change in Employment (Jan) expected at 22.5K
• CAD Unemployment Rate (Jan) expected at 7.5%

Price Action

• USD/JPY bit better bid at 76.00
• AUD/USD holds above 1.0700
• GBP/USD runs to 1.5850 on strong PMI data
• EUR/USD holds above 1.3150 ahead of NFP

Risk FX was mildly bid in a typically quiet pre-NFP session boosted by better than expected UK PMI numbers and slightly positive tone in European equities. With no major economic data out of the Eurozone the only report of note was the UK PMI services release which surprised to the upside printing at 56.0 versus 53.5 expected.

The UK PMI services reading was the highest since March of 2011 and marked the 13th consecutive month of expansion in the sector. Markit Economics which compiles the data, issued a no recession call in light of the fact that all three UK PMI surveys remained above the 50 boom/bust line with manufacturing and services sectors improving markedly this month. The rise in data was driven by sharp improvement in business sentiment as the concerns over the EZ credit crisis began to wane.

The sharp improvement in recent UK economic data puts in doubt the possibility of more QE from the BOE, although most market analysts believe that the central bank will err on the side of caution with a 50 billion GBP addition at its next MPC meeting. Nevertheless, latest PMI data has clearly tilted the scales in favor of pound bulls and if today’s NFP report surprises to the upside providing further support to risk flow GBP/USD could take out the key 1.5900 level and possibly even target 1.6000 as it rallies to fresh yearly highs.

Elsewhere, German economy minister Philip Reosler rejected the idea that ECB should participate directly in the write-down of Greek debt stating the “European states and their taxpayers already make a massive contribution to Greece's restructuring process though their support efforts."

The IMF is urging the ECB to also accept write-downs on the estimated EUR40 billion of Greek bonds that the central bank  holds. Germany, however, is adamantly opposed to such a plan, fearful that it would force the ECB to recapitalize its balance sheet through more taxpayer contributions. Some market analysts have noted that private sector haircuts alone will not be enough to restructure Greece’s massive debt load and that the country will ultimately require write-downs from the public sector bond holders in order to bring its debt service to a manageable level. The Greek debt saga remains a serious concern for the market, but traders are clearly experiencing headline fatigue as yet another week passes by without a definitive agreement.

Turning to today’s NFP’s the consensus view is for 125K call and if the data meets or exceeds the number it should prove positive for risk, as market expectations have been tempered over the past few days. As our colleague Kathy Lien noted, “Most of the leading indicators for non-farm payrolls point to weaker job growth but there has not been enough deterioration in these reports to lead to us to believe that payrolls will be abysmally weak. Unless American companies added fewer than 100k jobs last month, the dollar may only see a limited reaction to payrolls.”    

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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.