Will NFPs Destroy the Dollar?

[B][U]Talking Points[/U][/B]

  • Australian Dollar: PMI Services hotter
  • Euro: PMI Services revised higher, Retail Sales miss
  • Pound: PMI Services surprises down
  • Dollar: NFP on tap

[B][U]Will NFPs Destroy the Dollar?[/U][/B]

A typical pre-NFP session with trading in the majors slow and listless as most market participants square up ahead of the release of the US Non-Farm payrolls data due today at 12:30 GMT. On the economic front the night offered no surprises with most releases printing broadly in line. In Australia the Services PMI continued the string of positive news from the land down under, beating last month?s data of 54.9 with at 56 reading in July. In addition the TDMI inflation gauge rose significantly higher to 0.6% from 0.2% the month prior suggesting that inflationary pressures are accelerating.
Overall the Aussie data makes a strong case for a 25bp rate hike at the next RBA meeting on August 7th. The good news however did not translate into positive price action for the Aussie as the unit traded cautiously ahead of the US release. The high yielders continue to take their directional cue from global equity markets as risk consideration rather than interest rate spreads dominate order flow for the time being. Furthermore, there is talk in the markets that despite recent economic strength the RBA may choose to hold off on a rate hike in August, instead signaling that the increase would occur in September. The delay would no doubt frustrate Aussie bulls and may be one of the reasons why the unit has been unable to crawl back above the 8600 figure tonight.
In Europe the news was generally in line with market forecasts showing little impact on price. EZ PMI Services firmed a bit more than expected while UK services data dipped slightly, but both gauges remained well above the 50 boom/bust level indicating that economic activity remains vigorous across the pond. Today of course all eyes are on the US NFP report especially in light of the much softer ADP numbers on Wednesday. US capital markets have been rocked all week by the growing problems of the housing sector, but yesterday equities bounced as risk appetite returned. The critical question facing the currency market is whether the US economy can absorb and contain the fallout from the sub-prime fiasco. Employment is central to the bullish case. As we?ve noted many times before 100K+ new jobs keeps Fed on the sidelines for the rest of the year. However, this week ADP projects that the number may be as weak as 75K which would suggest that the housing sector blues are infecting the rest of the economy. Should that occur, the currency market will begin to lower growth expectation for the US economy which in turn may trigger further outflow from dollar denominated assets as the rest of the world continues to outperform.