Dollar Dominates Ahead of NFP

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Market Drivers March 6, 2015

ESM Regling – Greece must pay its loans in full – sends EUR/USD below 1.1000 again
BOE Inflation report 1.9% vs. 2.5% sends cable below 5200
Nikkei 1.17% Europe -0.01%
Oil $51/bbl
Gold $1193/oz.

Europe and Asia:
AUD AIG Construction 43.9 vs. 45.9

North America:
USD NFP 8:30

CAD Trade 8:30

Both euro and cable slipped to fresh session lows in morning European dealing dogged by the individual set of concerns as markets prepared for US NFP report due later today at 13:30 GMT. The EUR/USD fell to fresh 11 year lows dropping to 1.0967 after comments from ESM chief Klaus Regling showed no room for compromise.

Mr. Regling stated flatly that all loans taken out by Greece must be paid in full adding that Athens has been irritating at times. Mr. Regling’s intransigence did not help sentiment as traders pushed the pair to fresh lows on fears that political risks in the region will flare up again.

It’s difficult to say if European officials genuinely believe this rhetoric or whether this is simply a negotiating tactic to get further oversight concessions from Greece. No rational human being can believe that Greece will ever be able to service its debt which is well in excess of 150% of GDP especially as the country’s economy has contracted by nearly a third over the past 5 years.

The country’s economic problems are a festering wound to the whole euro project, but for now officials in the region refuse to deal with the issue seriously and that continues to weigh on the EUR/USD as markets are becoming concerned once again with the risk of fracture.

Meanwhile in UK the BOE inflation report – which is not usually market moving – sent cable below the 1.5200 mark after it showed that inflation was 1.90% versus 2.5% the year prior. Lower inflation readings are likely to remain as drop in energy prices continues to make its way through the UK economy. However, BoE has made a series of statements that they will be looking through the temporary disinflationary factors, suggesting that the monetary policy goal remains to tighten as the year progresses.

Turning to the NFPs the markets are primed for another 250K number, but expect a smaller rise in average hourly earnings of only 0.2% versus 0.5% the month prior. The strongest evidence for a dollar bullish number lies in the employment component of the ISM Services report which rose to a very impressive 56.4 versus 51.4 the month prior. Although that reading has been far from perfect in forecasting the NFP number, it has generally been a reliable gauge of the labor market given the fact that US economy is more that 70% service focused.

Another strong print in the NFPs could really break the back of the euro pushing it below the 1.0900 figure as markets begin to price in the growing divergence between the two central bank monetary policies. A reading of 250K new jobs or more and more importantly further gains in average hourly earnings could finally convince the Fed that US economic growth is sustainable and it has finally become time to normalize policy.

Boris Schlossberg
Managing Director

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