Euro Recovers Most of NFP Selloff

Talking Points
• Yen: Q4 GDP revised higher on stronger CAPEX
• Yen: Domestic CGPI in- line at 0%
• Pound: PPI in line
• Dollar: calendar empty save for Feb. Treasury budget

Euro Recovers Most of the NFP Sell Off
Euro gained strength as trading started for the week, fueled first by an early stop run in the EURJPY cross during the Wellington open and the then by the hawkish comments from ECB member Liebscher who stressed that the battle with inflation in the EZ was not over and even stated that he would be willing to tolerate lower growth in the economy in order to keep price pressures under control. Mr. Liebscher’s comments buttressed the euro bulls view that the central bank will continue to raise rates, with the next hike most likely to come in June.
By mid morning of European session the EURUSD had retraced most of its post NFP losses as traders reassessed the seemingly dollar bullish Friday’s US jobs report. As we noted in our weekly, the headline numbers masked several structural weaknesses in the US data. More than 350,000 workers have dropped out of the job force rendering the low unemployment rate almost meaningless as US labor participation rates have declined. Nearly 40% of the jobs this month came from the government sector – hardly a sign of a booming economy. Finally, as many analysts have pointed out the BLS birth/death model which arbitrarily adds or subtracts jobs from the final number may have skewed the results the upside in February.
Although these are the standard gripes of dollar bears during nearly every recent NFP report, the US jobs data contained enough ambiguity to temper any further dollar strength. The true direction of the pair is likely to be determined by tomorrow’s US Retail Sales report which should provide a more accurate picture of the health US consumer upon whom rests the whole of the US economy. The US Retail Sales report is projected to rise by 0.3%. If the recent miss by Walmart is a foreshadow of the weakness in overall sales this number could surprise to the downside indicating that the recent woes in the US housing sector are beginning to impact consumer spending. If, however, the report meets or beats the forecast, the faith of the dollar longs in the resiliency of the US economy should be rewarded and the greenback may move right back to the 1.3100 level as the notion of any Fed easing will disappear completely from traders minds. To make matters even more complicated the rise in gasoline prices could actually push the headline number higher while actual consumer demand could decline. That’s why the market will most likely key off the Retail Sales ex-gasoline as the true indicator of the health of the US economy.
Meanwhile across the pond, UK PPI inflation gauges printed essentially in–line with input costs declining by greater than expected –1.1% while output inched a but higher to 2.2%. The news was basically neutral to the pound as markets continue to forecast that the BoE will stay pat for the time being observing the impact of its last rate hike in January which lifted the UK repo rates to 5.25%