Which Currency Benefits Most from an NFP Beat?

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Market Drivers Dec. 7, 2012
BUBA downgrades German growth
Japan has 7.3 earthquake but no serious damage, UK IP drops sharply
Nikkei -0.19% Europe -0.40%
Oil $86.42/bbl
Gold $1700/oz.

Europe and Asia:
AUD Trade Balance -2.09B vs, -2.15B
AUD AiG Performance of Construction Index 37.0 vs. 35.8
JPY Leading Index 92.5% vs.92.0%
EUR German Industrial Production n/a
GBP NIESR GDP Estimate n/a
GBP Industrial Production -0.8% vs. 0.9%
GBP Manufacturing Production -1.3% vs -0.2%

North America:
USD Change in Non-farm Payrolls 8:30
USD Unemployment Rate 8:30
USD Average Hourly Earnings All Employees 8:30
USD Change in Household Employment 8:30
USD Change in Manufacturing Payrolls 8:30
USD Change in Private Payrolls 8:30
USD Underemployment Rate 8:30
USD U of Mich Confidence 9:55
USD Consumer Credit 15:00
CAD Net Change in Employment 8:30
CAD Unemployment Rate 8:30
CAD Full Time Employment Change 8:30

It’s been a cautious night of trade the FX market, marked by downgrade of German growth, as jolt from an earthquake in Japan that so far appears to have done little damage and a surprisingly weak UK Industrial production data that suggested another negative reading for Q4 GDP. Euro continued to drift lower in quiet pre-NFP trade dropping through the 1.2950 barrier as downgrade of economic growth from German central bank weighed on the pair. BUBA lowered its growth forecast for 2012 from 1.0% to 0.7% while the forecast for 2013 was revised markedly lower to only 0.4% from 1.6% initially projected.

The anemic rate of growth indicates that the recession that has been plaguing the periphery economies for more than two years is now making its way to the core. BUBA noted that its lower forecast was due to the uncertainties revolving around the EZ crisis, but stated that it expects Germany to return to the growth path soon. Nevertheless it stated that the balance of risk is skewed to the downside and the glum assessment helped to push the euro lower.

Risk FX was also hit by flash news that Japan suffered a 7.3 earthquake off its coast. So far there has been no reports of widespread damage and the earthquake triggered only a very small tsunami near the Miyagi The news of yet more damage for economically troubled Japan sent risk sentiment tumbling initially with USDJPY dropping to 82.17 from session high of 82.54 but the markets quickly stabilized as it became apparent that the damage is likely to be minimal.

In UK both Industrial output and manufacturing output fell sharply with IP down -0.8% versus 0.9% eyed while manufacturing contracted -1.3% versus -0.2%. Although the sharp declines in IP were mainly due to one off effects of the closure of the Buzzard oil field, the net impact of the data is that it may push UK Q4 GDP once again into negative territory, creating a triple dip as the country’s economy struggles to generate growth. The news sent cable lower by 30 points and it remained near session lows at 1.0630 in the aftermath of the release. If risk sentiment does not improve as the day proceeds sterling will likely test the 1.6000 level in North American trade.

Overall the FX markets remain in a cautious mood ahead of the NFP with slight negative bias and will likely tread water for rest of the session as traders await the US labor numbers. The markets are looking for a weaker print anticipating only 89K new jobs versus 171K last month. Given the impact of hurricane Sandy, that appears to be the proper bet, especially given the sharp declines in the employment components of both ISM indices. There is even a strong possibility that NFP could print below 50K which could send risk tumbling. On the other hand if NFP surprises to the upside they could prompt a very sharp rally in risk as it would show that US economy remains resilient even in the face of weather shocks. The Aussie which has remained well bid over the past few days would likely benefit the most, rallying to 1.0500 as a result of better US economic data.

Boris Schlossberg
Managing Director

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