Market Drivers January 06, 2017
PBOC revals yuan the most in 11 years
AU Trade turns to surplus
Nikkei -0.34% Dax -.26%
Oil $54/bbl
Gold $1178/oz.

Europe and Asia:
AUD Trade Balance 1.24B vs. -0.55B
EUR Retail Sales -0.4% vs. -0.3%

North America:
USD NFPs 08:30
CAD Employment 08:30

It was an uncharacteristically active pre-NFP session in Asia trade today, especially for USD/JPY which first probed the 115.00 barrier and then popped back above the 116.00 figure on moves by the Chinese central bank.

The PBOC hiked the CNY rate the most in 11 years pushing the currency up by more that 1% against the buck as it tries to support the unit ahead of the Chinese New Year holiday at the end of the month. The moves caused some volatility in the USDJPY as well with the pair first falling sharply to 115.00 and then quickly rebounding to retake 116.00 where it sat for most of Asia and early European trade.

With US NFPs dues to be released at 13:30 GMT the focus will shift squarely to US data which could be key to setting the market tone for the next few weeks. The dollar rally has stalled since the holidays and yesterday’s price action suggested that the greenback may be setting up for a bigger correction unless the employment report shows some upside surprises. Yesterday both the ADP and the employment component of the iSM Non-Manufacturing report missed their marks badly indicating that the labor data for December may be weaker than forecast.

The market projection is 175K against 178K the month prior, but if the number prints at 150K or less the buck could sell off further especially if the weaker numbers are also accompanied by slow wage growth, Wage growth is the absolute essential element for further Fed rate hikes as without it any inflationary pressures will be null. That’s why more than the absolute number of jobs, the market is likely to focus on wages to determine if aggregate demand continues to expand at a healthy pace.

Ahead of the report, the fixed income markets remained muted with yields on the benchmark 10 year dropping to 2.35% – well below the 2.5% mark at the end of last year. The slow drift lower in rates is capping any upside moves in USDJPY and if NFPs push the 10 year toward the key 2.30% support level, USD/JPY will likely tumble below 115.00 as sentiment in the market shifts from unadulterated optimism to caution.

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