NEWS / Foreign Exchange

Currencies Quiet Awaiting NFP Data

Talking Points

??? Japanese Yen: Coincident index slips further below 50
??? Euro: Consolidates gains from breakout yesterday
??? British Pound: Hugs the 1.9700 level
??? US Dollar: NFP on tap

Currencies Quiet Awaiting NFP Data

Majors hugged very tight ranges in Asian and European sessions as trading was particularly quiet ahead of the US Non-Farm payroll numbers. In addition, capital markets in Europe and US are closed today for the Good Friday holiday. Therefore, given the lack of liquidity, currency trading may be even more volatile than the typical NFP Friday.

In Japan today, the Leading Indicator index slipped further down to 30 from 40.9 the month prior. The index has spend the last eight months below the 50 boom/bust level but during that time has been woefully inaccurate in predicting an actual economic slowdown as Japan??™s GDP expanded at a healthy 3.8% - far stronger than most analysts predicted. Nevertheless, the LEI news should not be dismissed out of hand, especially if consumer sentiment begins to waver once again. Next week the market will see the figures from the Eco Watchers survey which should provide a much better picture of the true state of affairs in Japan. Market reaction to the LEI was essentially non-existent as USD/JPY remained stationary at 118.80.

The euro meanwhile consolidated its gains after breaking above the 1.3400 level in yesterday??™s New York trade. This week the Eurozone industrial data has consistently surprised to the upside suggesting that at least up to now the manufacturing sector has not suffered the consequences of a strong euro. In contrast the US data has produced worse than expected results all week long and that combination of positive EZ news and negative US releases has given the EURUSD a decidedly bullish tilt.

Of course, that dynamic can change in a second if Non-Farm payrolls print materially higher than forecast. The dollar bearish argument rests on the assumption that US will fall into a recession as its citizens begin to default on the massive amount of housing debt accumulated over the past decade. However, is the US economy continues to create jobs along with wage growth, the additional income will continue to service the mortgage debts averting a credit crunch. As we noted at the beginning of the week, the key to the health of the US economy as well as the strength of the dollar is whether US growth can outrun its mounting debt obligations. That??™s why today??™s NFP figure may be key to the long term direction of the pair. An in-line or better than expected number and dollar longs may live another month, but if jobs growth collapses, the market will start to accept the doomsday scenario of dollar shorts and the greenback could be in for another wave of selling.