Euro and Pound Drift as All Eyes on NFP

[B]Talking Points

[/B]- Japanese Yen: still mired at 116.50 as Japan out for holiday

  • Euro: Rise capped at 1.4140 as traders await MFP
  • Canadian Dollar: Jobs on tap
  • USD: All eyes on NFP

A very thin trading session in the currency market tonight exacerbated by the start of a long holiday week-end in Japan and today?s US Non-Farm payrolls which have been eagerly awaited by traders all week long. The dollar staged a mild rebound on Wednesday on the assumption that this month?s data would show a significant improvement over August?s very weak -4K reading, but yesterday?s increase in jobless claims and big decline in US Factory Orders took the starch out of dollar longs.
The employment situation remains the key to dollar?s near term direction. If the NFP prints north of 100K the Fed may hold off on any further rate cuts for the rest of the year and that could spur a drop in the EURUSD back below 1.40. If on the other hand ,the market sees a second consecutive negative reading in jobs another rate cut will be assured and the greenback could easily weaken to 1.45 against the euro. Anywhere in the middle and we will likely see the same standstill conditions that prevailed this week, as traders attempt to gauge the extent of the slowdown in the US economy. For now the bulls and the bears appear to have reached an uneasy truce, as most recent US economic data has been mixed, showing a perceptible contraction in demand, but nowhere near the recession-like numbers that dollar short have been calling for.
Yesterday the euro also received a mild boost from President Trichet?s comments regarding inflation. Unlike the Fed which focuses on core inflation readings (ex-energy and food), the ECB chief made an overt reference to the headline CPI numbers, stating specifically that he expected to see them increase above the 2% rate that the central bank targets. Mr. Trichet?s pointed focus on inflation suggests that he has not abandoned the idea of one more rate hike in this tightening cycle, but under current conditions we continue to doubt that the ECB will make any further moves for the rest of the year, especially if the EZ PMI readings extend their decline in the next few months.
Today also brings not only the US payroll numbers but Canadian employment report as well. With USDCAD trading below parity, currency traders have made a big bet that the resource rich Canadian economy will decouple from the recent US weakness. However, most recent Canadian economic data suggests a slowdown taking place in the Great White North as well. Latest GDP readings missed their mark printing at 0.2% versus 0.4%, while yesterday?s Ivey PMI employment component indicated that today?s jobs data may come out on weaker than expected. Given loonie?s grossly overbought status, if the market sees a downside surprise from Canada and an upside result from US, the USDCAD pair could stage a rebound well into next week.