Market Drivers December 2, 2016
USDJPY drifts below 114 ahead of NFP
UK Construction PMI Improves
Nikkei -0.47% Dax -0.94%
Oil $50/bbl
Gold $1176/oz.

Europe and Asia:
AUD Retail Sales 0.5% vs. 0.3%
GBP UK Construction PMI 52.8 vs. 52.2
EUR PPI 0.8% vs. 0.2%

North America:
USD NFP 8:30
CAD Employment 8:30

It’s been a typically subdued night of trade ahead of the marquee event of the week as the currency market gears up for the Non-Farm Payroll report due at 13:15 GMT today.

The consensus view has inched up to 177K from 161K earlier in the week as recent spate of US data has consistently surprised to the upside. There is a decent chance that NFP could print above the psychologically important 200K mark as boost in consumer sentiment may have spurred more hiring by small businesses in the wake of Donald Trump’s win.

Aside from the focus on the headline number, the market will pay careful attention to the average hourly earnings figure. The forecast stands at 0.2% versus 0.4% the month prior, but if the number meets last month’s results the dollar is almost sure to extend its rally as the market view will shift from simply anticipating a single rate hike from the Fed in December to pricing in a full tightening cycle in 2017.

Ahead of the report the buck was little weaker against both the yen and the euro as some profit taking a squaring up dominated trade in both Asia and Europe. But although a positive release is well anticipated by the market, as strong NFP could still create enough momentum to test key levels in both USDJPY and EURUSD with dollar bulls eyeing the 115.00 figure in the former and the massively important 1.0500 level in the later.

The euro especially could be vulnerable to a strong US release, because in addition to economic news, the single currency faces a serious political risk over the week-end. In Italy, voters will go to the polls to decide on a new reform referendum to expedite the legislative process in the country. No polls are permitted 15 days ahead of the vote and the last survey showed the No vote firmly ahead. The referendum is aimed at streamlining Italy’s government decisions by reducing the role of the Senate and regional governments. But is now seen as just another policy prescription rammed down the throat of populace by the “elite”. Prime Minister Renzi pledged to quit if the vote is rejected which would create another political crisis in Italy especially as the vote has been viewed as a referendum on EU membership. Italy is the third largest economy in the Eurozone and that could mean further challenge to the EU project. At very minimum a no vote would require further liquidity infusion by the ECB in order to help the troubled Italian banks and would only exacerbate the policy divergence between the ECB and the Fed.

For now the 1.0550 level has held steady in the EUR/USD throughout the month of November, but a positive NFP report along with increased concerns about the Italian vote on Sunday could see 1.0500 figure fall by the wayside before the day’s end.

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