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FX Daily - Mellon Foreign Exchange

Key Points
??? US employment report is unlikely to fundamentally alter the notion of US growth moderation.
??? USD weakness, emerging currency strength favoured in the short-term.
??? Canadian employment report also due today.

Market Outlook

EUR-USD has held on to the gains seen following yesterday??™s hawkish ECB presentation, which firmly indicated that rates would rise on August 3. Uncertainty about today??™s US employment report is the main factor holding it back from a test of 1.2850 (see below for preview of employment report). However, there is a clear risk that today??™s report fails to significantly boost expectations of Fed rate hikes. This is not to say that the payroll number won??™t be a high one (the ADP estimate earlier this week certainly suggests that this is where the risk lies) more that the data is unlikely to fundamentally alter the overall concept of growth moderation. Payrolls have been softening for some months and this would be just one month of data strength (unless there are some enormous back revisions). Furthermore, other key data releases have been showing weakness and the softer showings in both of the key ISM numbers are a more reliable indication of possible growth moderation. In sum, there is every chance of more EUR-USD strength (and general USD weakness) in the short-term. A close above 1.2850 is needed to raise hopes of an attack on the key levels just below 1.30. If the growth moderation/possible Fed rate pause argument does retain support, further gains should also be seen in highrisk assets like emerging currencies and equities. Whether this improvement turns into something more sustainable will, amongst other things, depend on key data releases such as the US CPI report due on July 19. If that were to come in at +0.2%, it would significantly boost expectations of an unchanged rate outcome on August 8. Bernanke??™s semi-annual policy testimony is also on July 19.

Day Ahead

US ??“ the employment report is the main feature and recent payroll numbers have been disappointing. Last month??™s employment report was soft and along with past downward revisions, payrolls (+75k last time) have been edging lower since February. However, Wednesday??™s ADP estimate of payrolls (+368k) was very strong and this has introduced some upside risk to today??™s number. ADP, which provides payroll services, takes a sample (14mln employees) of its own data and uses this as a basis for estimating total private sector employment, claiming to have a 0.9 correlation with % m/m changes in the private sector element of official non-farm payrolls. Looking at recent incidents of ???large??™ ADP numbers the evidence is mixed on what it means for this month??™s official data. In February, for example, the ADP estimate was +342k, with official total payrolls at +200k and official private sector payrolls at +168k, while in November last year the ADP estimate was +362k compared to official payrolls of +354k and private sector payrolls of +326k. So, a good indicator last November but not so good in February. Overall, it does suggest an upside risk to Friday??™s number, but not conclusively so. It is

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Diary


CA Employment (Jun) 07.00 +10k
CA Unemployment rate (Jun) 07.00 6.2%
US Non-farm payrolls (Jun) 08.30 +175k
US Unemployment rate (Jun) 08.30 4.6%
US Average workweek (Jun) 08.30 33.8
US Hourly earnings (Jun) m/m 08.30 +0.3%

Latest data Actual Consensus*
GB NIESR GDP (3mths to Jun) q/q +0.6% +0.6% last
CH Unemployment rate (Jun, sa) 3.3% +3.3%
NO Manu output (May) m/m +4.2% +1.2%
DE Ind prod (May) m/m +1.5% +0.6%
* Consensus unless stated

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difficult to gauge where the actual market consensus now lies ??“ possibly in +200/240k area. Hourly earnings will also be monitored for inflation pressure and while last month??™s +0.1% m/m, +3.7% y/y outcome was weaker than expected, +3.7% is still much higher than the levels seen through last year.

Canada ??“ the Canadian employment report will be important for market sentiment ahead of next week??™s BoC meeting. This number was very strong last month (+96.7k) and coupled with a stronger than expected CPI number has revived talk of possible rate hikes. The BoC responded to this strength by saying that one should be wary of one month of data, so whether last month??™s employment strength is repeated or reversed will be significant for BoC policy expectations. There is always a risk that last month??™s strength was nothing more than a statistical aberration. Having signalled the likelihood of a pause at the last meeting on May 24, unchanged rates remain the more likely outcome next week, but a strong number today would certainly trigger speculation about a move. The BoC may also want to take a look at the next CPI data (due July 21). If there is a disappointing Canadian employment number, this would push USD-CAD higher initially, but selling into those rallies is favoured as a generally weaker USD should help to pull USDCAD lower in any case. Short-term support is at 1.1035 ahead of 1.0930-60. Initial resistance is at 1.1150.

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