Pre-Election NFP Results Could Create Opposite Reaction in FX

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Market Drivers October 5, 2012
BOJ leaves policy unchanged
All eyes on NFP
Nikkei up 0.44% Europe up 0.47%
Oil $91/bbl
Gold $1791/oz.

Europe and Asia:
AUD AiG Performance of Construction Index 30.9 vs. 32.2
JPY Leading Index 93.6% vs. 93.6%
EUR German Factory Orders n/a

North America:
USD Change in Nonfarm Payrolls 8:30
USD Unemployment Rate 8:30
USD Average Hourly Earnings All Employees 8:30
USD Underemployment Rate 8:30
USD Consumer Credit 15:00
CAD Unemployment Rate 8:30
CAD Full Time Employment Change 8:30

We had a typically static pre-NFP session in European trade tonight with currencies simply marking time until the release of the US payrolls numbers at 12:30 GMT later today. The EURUSD oscillated around the 1.3000 mark in the wake of ECB press conference yesterday at which Mario Draghi reaffirmed the commitment to support the euro and control the pressure on sovereign debt rates via the OMT program.

In Japan today the BOJ left rates at 0.1% while keeping QE at the same levels, disappointing the currency market and sending USDJPY below the 78.50 mark in afternoon session Asian trade. The BOJ acknowledged that the export sector was under pressure, but also noted that domestic demand has remained relatively firm.

Looking ahead, the BOJ noted that risks to growth remain high with uncertainty surrounding, “the prospects for the European debt problem, the momentum toward recovery for the U.S. economy, and the likelihood of emerging and commodity-exporting economies simultaneously achieving price stability and economic growth. Furthermore, attention should be paid to the effects of financial and foreign exchange market developments on economic activity and prices.”

Yet despite the clear slowdown in Japanese economy the BOJ refused to take any further monetary policy action, stating only that the “The Bank continues to conduct monetary policy in an appropriate manner.” The reticence of Japanese authorities to act forcefully, especially in light of dramatic moves by both the Fed and the ECB has left the market disappointed once again with USD/JPY slipping below the 78.50 level ahead of today’s NFPs. At the press conference today Governor Shirakawa stated that reckless buying of the JGBs could trigger sudden bond yield spike. Although most recent history has shown that such concerns are baseless, Mr. Shirakawa’s statement suggests that monetary policy will not change radically any time soon. Japanese fiscal officials are clearly concerned about the effects of strong yen on the country’s export growth but with monetary policy in paralysis, there are no major catalysts to change the current dynamic.

Turning to the NFPs today, the picture looks decidedly unclear. Market expectations are for 113K print and some analysts have pointed out that that 2.7% decline in the ISM Services subcomponent indicates that the number could miss expectations. However, an article from Wall Street Journal noted that August data has been revised upward 21 out of the past 28 years and such upward revisions could prove positive for risk appetite. If the NFP numbers print at 150K or better and the prior months as revised upward the initial reaction could help push risk assets higher with EURUSD targeting 1.3050. However, in the perverse logic of pre-election markets, such news which would be viewed as negative towards the chances of a Romney win could also spur some quick profit taking on the results.

Boris Schlossberg
Managing Director

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