Nervous FX Markets Await NFP

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Top Stories

  • Markets remain jittery as volatility spikes to record highs EZ credit spreads in focus
  • RBA upbeat but market skeptical
  • Nikkei off -3.72% Europe pares losses to -0.37%
  • Oil below $85/bbl
  • Gold at $1661/oz.

Overnight Eco

  • JPY Leading Index (JUN P) 103.2% vs. 103.6%
  • CHF Consumer Price Index (YoY) (JUL) ).5% vs. 0.6%
  • CHF Consumer Price Index (MoM) (JUL) -0.8% vs. -0.5%
  • EUR German Industrial Production s.a. (MoM) (JUN) n/a
  • EUR German Industrial Production n.s.a. and w.d.a. (YoY) (JUN) n/a
  • GBP Producer Price Index Input n.s.a. (MoM) (JUL) 0.6% vs. 0.6%
  • GBP Producer Price Index Input n.s.a. (YoY) (JUL) 18.5% vs. 16.8%
  • GBP Producer Price Index Output n.s.a. (MoM) (JUL) 0.2% vs. 0.2%
  • GBP Producer Price Index Output n.s.a. (YoY) (JUL) 5.9% vs. 5.7%

Event Risk on Tap

  • USD Change in Non-farm Payrolls (JUL) expected at 91K
  • USD Change in Private Payrolls (JUL)
  • USD Unemployment Rate (JUL) expected at 9.2%
  • USD Avg Hourly Earnings (MoM) (JUL) expected at 0.2%
  • USD Avg Hourly Earnings (YoY) (JUL)
  • USD Avg Weekly Hours All Employees (JUL)
  • CAD Unemployment Rate (JUL) expected at 7.4%
  • CAD Net Change in Employment (JUL) expected at 20.3K
  • CAD Building Permits (MoM) (JUN) expected at -4.7%
  • CAD Ivey Purchasing Managers Index (JUL) expected at 62.9

Price Action

  • USD/JPY anchored to 78.50 most of the night
  • AUD/USD 1.0500 caps any rallies as concerns over global growth weigh
  • GBP/USD stable at 1.6250 as PPI nonevent
  • EUR/USD spikes to 1.4250 on short covering flows and recovery in Italian banks

Currency markets remained jittery ahead of US NFP report as volatility continued to spike in Asian and early European trade with both equity and credit markets in near panic mode before risk aversion flows eased somewhat by the mid morning European session. European equity bourses initially opened lower by more than -3% following the steep selloff in Asia, but were able to recoup most of their losses helping to stabilize risk FX pairs as the morning wore on.

EUR/USD rose towards the 1.4160 level after making fresh lows at 1.4060 earlier in Asia driven higher by a massive spike in EUR/CHF which lifted the pair by more than 150 points in less than 10 minutes. Initially market participants thought that the sudden rise in EUR/CHF was the result of SNB intervention, but later reports suggested that the spike was caused by a large US buyer amidst very thin market conditions.

This type of volatility is likely to continue throughout the day as liquidity in the market remains at a premium and traders fear the prospect of intervention from non-price sensitive parties that will continue to skew trade flows. Although we believe that intervention will prove futile in the face of sinking fundamentals (note much of the unwind in USD/JPY after last night's BOJ action) the very near term price action could result in nasty short squeezes in risk FX as central banks try to fight the markets.

On the economic front the RBA Monetary Assessment for August revealed that officials remain upbeat about the country's prospects for 2012 but the markets took a more skeptical view. The RBA stated that growth is still expected to be a little above trend, reflecting the strong medium-term outlook for the resources sector. However, the central bank acknowledged that its forecast was highly dependent on the assumption that the resolution of sovereign debt issues in a number of countries proceeds in an orderly manner. It stated that " a more disorderly resolution is a key risk to these forecasts."

As we wrote earlier, "currency traders took the policy forecasts with a grain of salt fearing that the current turmoil in the global credit markets could devolve into a serious global slowdown that would threaten the assumption embedded in RBA's long term forecast." As a result Aussie remains capped by the 1.0500 figure and will likely remain below that barrier for the rest of the day unless NFPs print much better than expected.

In North America of course the focus will turn to the employment report due at 12:30 GMT. With market expectations decidedly negative, any upside surprise could trigger a strong short covering rally in both USD/JPY and USD/CHF. If the date prints at 150K or better the markets may breathe a sigh of relief that the threat of a double dip recession has been averted. On the other hand if the release confirms the worst fears of the bears printing at -50K or less risk aversion flows could return with a vengeance pushing USD/CHF through the .7600 level and USD/JPY back towards 77.00.

FX Upcoming

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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