Market Drivers for June 6 2014

Markets quiet ahead of the NFP

UK Trade deficit expands slightly

Nikkei -0.01% Europe .21%

Oil $102/bbl

Gold $1254/oz.

Europe and Asia:

AUD Construction Index 46.7 vs. 45.9

EUR German Trade Balance 17.7B vs. 15.1B

EUR GE Industrial Production 0.2% vs. 0.4%

GBP UK Trade -9.6B vs. -8.7B

North America:


CAD Employment 8:30 AM

Currency markets were predictably quiet ahead of the main event of the day as traders awaited the release of the US Non Farm payrolls report due at 12:30 GMT. The euro which staged a furious short covering rally in the aftermath of the ECB press conference was slightly off its highs as short term traders booked their profits from yesterday and squared up ahead of the US report.

Much ink has already been spilled about the surprising turnaround in the euro, so we will keep our observations brief noting only that it was Mr. Draghi reluctant tone to commit the full resources of the ECB behind the easing program that emboldened the longs to reverse the initial selloff. Although its obvious that the ECB is operating under much more difficult constraints then the Fed given its lack of power to enable a full blow QE program, the central bank still enjoys key institutional advantages one of which is its ability to set rates.

We noted yesterday that the threat of prolonged and perhaps even steeper negative rates would continue to put downward pressure on the euro. Yet when asked about the prospect of cutting rate further, Mr. Draghi demured noting that in his opinion the central bank had reached zero bound and that he could not foresee any steeper rate cuts in the future. That was a tactical mistake on his part. Had he simply remained noncommittal the bounce in the euro would have been much more anemic. However, his words provided a green light for longs to pile back into the trade and EUR/USD essentially reversed its losses from that point on.

We continue to believe that in the long run the downward pressure on the euro remains in place, but in the short run the rally in the pair can extend all the way to possibly 1.3800 level especially if today’s US NFPs disappoint. The preliminary data on payrolls is mixed with ISM Service employment component rising modestly but the ADP report showing a small pullback. Although weekly jobless claims have been shrinking at a steady pace that speaks to firings rather than hirings and we suspect that overall demand may be a touch soft given the lackluster consumer sentiment readings.

Therefore the prospect of a miss in NFPs that could show a print between 150K-175K is quite possible, though as always trying to handicap the release is a sucker’s game. Nevertheless if the data is weaker it could provide the impetus for EUR/USD to run the 1.3700 stops as the short covering rally maintains momentum.

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