Currency Markets to Look Past European Data, Focus on US Jobs Report (Euro Open)

Currency markets are likely to look past the releases of Swiss consumer prices and the European Commission’s updated economic forecasts to focus on US Nonfarm Payrolls data set to cross the wires late into the session, looking for the report to set the tone for risk sentiment and the majors.

Key Overnight Developments

• Japanese Capital Spending Rebounds in the Second Quarter
• Euro, British Pound Range-Bound Ahead of US Jobs Report

Critical Levels

The Euro consolidated in a narrow 20-pip range below 1.4260 through in overnight trading. The British Pound followed suit, oscillating in a choppy 40-pip band above 1.63.

Asia Session Highlights

Japan’s Capital Spending fell -21.7% in the year through the second quarter, rebounding from the record -25.3% annualized drop recorded in the first three months of the year. The non-manufacturing component of the metric was behind the improvement, where spending fell -14.2%, the least in a year, having declined -27.6% in the prior quarter. Capital spending for the manufacturing sector shrank -32.0%, accelerating from the -21.2% result noted in the previous period. On balance, this is somewhat encouraging: the non-manufacturing sector employs close to 66% of Japan’s labor force, so any signs that these firms are increasing capacity may translate into hiring, consumption, and ultimately boost economic growth. Still, it must be kept in mind that Japan’s savings rate stands at about twice that of the developed country average, so any improvement in the labor market will take considerable time to translate into spending growth.

Euro Session: What to Expect

Switzerland’s Consumer Price Index is set to show continuing deflation as prices shrink -0.7% in the year to August, marking the fifth consecutive month in negative territory. As we noted earlier this week, the danger is that steadily lower CPI will translate into expectations of lower prices in the future, encouraging consumers and businesses to perpetually delay spending and investment as they wait for the best possible bargain and bringing economic growth to a virtual standstill. The Swiss National Bank has explicitly committed to “take firm action to prevent an appreciation of the Swiss franc”, keeping a lid on the currency’s purchasing power and thereby limiting the drop in prices in terms of the domestic monetary unit. It is much easier for policymakers to drive down the Franc than to support its value because they can simply print more money and let it loose into circulation, suggesting it should not be too difficult for the SNB to keep down the exchange rate. Naturally, currency markets are well aware of this, and traders may move to pre-empt central bank to sell the Franc as another negative CPI reading crosses the wires.

The European Commission is set to update their economic forecasts for 2009 and 2010, with the announcement is unlikely to carry much market-moving potential. Indeed, the Euro failed to build momentum yesterday as the analogous set of expectations was upgraded by European Central Bank after policymakers kept interest rates unchanged at a record-low 1% while ECB President Jean-Claude Trichet stuck a dovish tone in the press conference following the announcement. The bank chief said uncertainty about the economic outlook remains “very high” and cautioned that the nascent recovery noted in a number of leading indicators faces a “bumpy road” ahead. He further added that the ECB sees “low inflationary pressure over the medium term” and stressed that “today it isn’t time” to unwind unconventional monetary easing measures. The markets’ 1-year interest rate expectations dropped -12.8% following the release, the largest one-day drop in a month.

On balance, currency markets are likely to pay little heed to the European data docket to focus on the US Nonfarm Payrolls report set to cross the wires late into the session. Traders have viewed US economic data as a proxy for the state of the global economy at large on expectations that a rebound in the world’s largest consumer market will reverberate elsewhere.

Written by Ilya Spivak, Currency Analyst
Article Source - Currency Markets to Look Past European Data, Focus on US Jobs Report (Euro Open)

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