USD/JPY Wobbles Ahead of NFP, Cable Hurt By Weak Trade

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Market Drivers for September 6th, 2013
USD/JPY retreats on Nikkei drop
UK Trade deficit widens markedly
Nikkei -1.45% Europe .02%
Oil $108/bbl
Gold $1368/oz.

Europe and Asia:
AUD AIG Construction 43.7 vs. 44.1
EUR GE Trade Balance 14.5B vs. 15.9
GBP UK IP 0% vs. 0.2%
GBP UK Trade Balance -9.9B vs. -8.2B

North America:
USD NPP 8:30
CAD Employment Change 8:30
CAD Ivey PMI 10:00

It’s been a typically quiet pre-NFP session in the currency market as traders geared for the marquee event of the week, but both USD/JPY and GBP/USD were markedly weaker in morning London dealing with yen reacting to the sell off in the Nikkei while cable was hurt by widening trade deficit

USD/JPY drifted away from the the key 100.00 level dropping all the way to 99.50 as profit taking in the Nikkei sparked risk aversion flows. The Nikkei fell nearly -1.5% as profit taking ahead of the weekend pushed stocks lower. The pair is also sensitive to the ongoing debate regarding the sales tax issue in Japan.

As we noted yesterday, Japanese officials are very concerned about the volatility in the JGB market. With US, UK and EU yields all rising the spillover into the JGB market could be very destabilizing for the Japanese capital markets and could create massive risk aversion flows that would inadvertently strengthen yen. USD/JPY therefore remains in a seesaw battle between the risk aversion flows that could drive it lower and the positive US economic data that could push the pair higher.

In UK meanwhile cable came under some pressure when both the IP numbers and the Trade balance data missed their mark. IP was 0.0% versus 0.2% eyed although all prior data was revised higher suggesting that the manufacturing sector continues to recover. More troubling was the wide gap in the UK Trade balance which printed at -9.853B vs. -8.15B. There was a sharp fall to non- EU countries.

This was the first negative piece of economic data from UK in more than a week and may weigh a bit on the pound for the rest of the day. The pair slipped to a low of 1.5565 and could test the 1.5500 level if US NFPs prove to be stronger than forecast.

Turning to the NFP report, the preliminary data appears to be mixed with ADP showing a slightly weaker labor growth this month, while the employment component of the ISM had a very healthy rise. The market anticipates a reading of 178K and any number above 150K will likely be viewed with relief by dollar bulls – keeping the taper hopes alive. However, if the number prints closer to 100K the dollar could take a serious hit, especially against the yen with USD/JPY likely slipping below 99.00 figure as the day proceeds.

Boris Schlossberg
Managing Director

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