Risk FX Higher as All Eyes on ECB

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Market Drivers September 6th, 2012
Australian employment dips but rate declines as well
Spanish yields drop markedly in latest auction ahead of ECB presser
Nikkei up 0.01% Europe up 1.27%
Oil at $96.40/bbl
Gold at $1712/oz. – above $1700 1st time since March

Europe and Asia:
AUD Employment Change -8.8K vs. -5.1K
JPY BoJ Shirakawa Speaks
EUR Eurozone GDP -0.2% vs. -0.2%
EUR German Factory Orders n/a
EUR ECB Rate Decision
GBP BoE Asset Purchase Target
GBP BoE Rate Decision

North America:
USD ADP Employment 8:15
USD Initial Jobless Claims 8:30
USD ISM Non-Manufacturing 10:00

Risk FX was slightly higher in European trade today ahead of the crucial ECB meeting that is expected to produce some sort of program to support EZ periphery sovereign bonds. The EURUSD rose to a near term swing high of 1.2630 but was unable to break higher and take out the 1.2650 barriers as traders remained cautious of taking aggressive positions ahead of the ECB presser.

Elsewhere in Australia employment turned negative for the second month out of the past three, but the unemployment rate unexpectedly declined causing a short covering rally in the AUDUSD that took the pair comfortably above the 1.0200 in early morning European trade. Australian employment declined by -8.8K versus forecasts of 5.1K rise while the unemployment rate dropped to 5.1% versus 5.3% anticipated.

Although the drop in unemployment rate was caused by the lowest participation rate in five years as it declined to 65%, it was nevertheless viewed positively by the market which saw the data as evidence that Australian labor markets are operating at near full capacity requiring no further easing from the RBA for the time being. At 5.1% the unemployment rate in Australia remains the envy of the G-10 universe and confirms the RBA’s view that monetary policy remains “appropriate”.

However, despite the relative optimism of the monetary authorities in Sydney, the latest employment report shows a marked weakness in labor demand as Australia lost jobs in three out the past seven months. The news on the labor front dovetails with other economic indicators that have shown slowdown in activity over the past several months. The labor data would have been much worse were it not for gains in resource heavy Western Australian region. Yet those gains are unlikely to continue as price of iron ore and coal has plummeted over the past few months.

Although Europe is likely to dominate trade in early North American session, the US data may have impact on FX dealing as well. With ADP, ISM and weekly jobless claims on tap, traders will have plenty of fresh evidence to consider regarding the state of the US economy and the prospect of further QE. Indeed the market may face a torrent of cross currents if ECB fails to provide clear details of its plans, but the US data prints weaker than expected raising the specter of QE3.

At present the currency market finds itself in a uneasy state of equilibrium with EURUSD trading within the 1.2500-1.2600 for the better part of last week. Today’s events could break this deadlock especially if Mr. Draghi makes a forceful case for intervention and US data prints soft indicating that monetary policies of both ECB and the Fed will remain highly accommodative for the foreseeable future.

Boris Schlossberg
Managing Director

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