Euro Steady Ahead of NFPs Despite Downgrade of France

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Market Drivers for November 8, 2013
S&P downgrades France to AA from AA+ no effect on euro
RBA downgrades outlook for 2014
Nikkei -1.00% Europe –0.58%
Oil $94/bbl
Gold $1310/oz.

Europe and Asia:
RBA Monetary statement – downgrade
EUR French IP -0.5% vs. 0.4%
GBP UK Trade Balance -9.8B vs. 9.1B

North America:
CAD Employment 8:30 AM
USD Non Farm Payrolls 8:30 AM
USD Personal Income
USD Personal Spending
USD U of M

High beta currencies were generally quiet in a typical pre-NFP session on the last trading day of the week, as EUR/USD shrugged off a surprise downgrade on the sovereign debt of France. S&P downgraded French debt to AA from AA+ citing concerns over growth.

S&P stated that Europe’s second largest economy faces challenges as high unemployment and lack of structural policy reforms will likely weigh on growth going forward. Indeed as if on cue French Industrial Production today showed a marked decline to -0.5% from 0.4% eyed demonstrating the country’s current problems in the manufacturing sector.

Yet despite the sclerotic growth in France, the S&P downgrade and yesterday’s surprising 25bp cut from the ECB, the euro has remained remarkably resilient holding above the 1.3400 level throughout the European session trade. The unit continues to benefit from capital flows as foreign investors are lured by the prospect of recovery in the region as a whole. Therefore for now it remains exceedingly difficult for European monetary policy makers to lower the value of the currency in any sustained fashion and this dynamic will likely remain in place until the market becomes more certain that the Fed will taper by the start of next year.

Elsewhere, the RBA issued its monetary policy statement which asserted that the central bank has not closed off the possibility of further rate cuts if needed and once again expressed concern over the high value of the currency. The central bank also lowered its outlook for growth and noted that unemployment may increase before declining once again in 2015.

The dour message initially sent AUD/USD to fresh session lows, but the unit quickly popped back up after the released of Chinese Trade data which saw the surplus rise to 31B from 24B eyed. China will release a slew of economic data over the weekend including Retail Sales and Industrial Production and the results will likely impact AUD/USD trade on the Sunday open.

For the Aussie, just like the euro is getting the benefit of the doubt. Despite weak labor market conditions and a generally dovish central bank, investors are willing to buy the unit as long as the growth situation in China remains stable. For now the AUD/USD continues to hold above the 9450 level as 9400 support stays in place.

Turning to the marquee event of the day, the US Non-Farm payrolls event is due at 13:30 GMT and one possible outcome of the release may be that its causes little disruption in the market. This is especially probable if the NFPs print anywhere within the expected range of 120-140K. The fallout from the US government shutdown has likely created so much noise in the system that investors could ignore the data for October, especially if it does not provide clear clues as to the Fed policy going forward.

The currency markets will come alive only if NFPs are widely off the mark, printing less than 100K or better than 170K. Yesterday massive reversal in USD/JPY despite the positive GDP data augurs badly for dollar bulls as 99.00 level will likely remain formidable resistance for the pair and any weak reading could sent it much lower to test the support at the 97.00 level. On the other hand if NFPs provides a blowout number the dollar rally could resume with gustn sending USD/JPY through 99.00 and EUR/USD below 1.3300 as currency markets begin to seriously price in the prospect of taper.

Boris Schlossberg
Managing Director

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