US Payrolls Key To Further Rally in Risk

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Market Drivers September 7, 2012
Risk explodes higher as ECB bond support program received well
NFPs key event risk for the day
Nikkei up 2.20% Europe up 1.44%
Oil $96/bbl
Gold $1699/oz.

Europe and Asia:
AUD AiG Performance of Construction Index 32.2 vs. 32.6
AUD Trade Balance -0.56B vs. -0.3B
JPY Leading Index 91.8% vs. 91.7%
CHF Unemployment Rate 2.9% vs. 2.9%
EUR German Trade Balance 16.1B vs. 15.5B
EUR German Industrial Production n/a
GBP Industrial Production 2.9% vs 1.6%
GBP Manufacturing Production 3.2% vs. 1.8%
GBP PPI 0.5% vs. 0.2%

North America:
USD Change in Non-farm Payrolls 8:30
USD Average Hourly Earnings All Employees 8:30
USD Underemployment Rate 8:30
CAD Unemployment Rate 8:30
CAD Net Change in Employment 8:30
CAD Full Time Employment Change 8:30

Risk FX continued to move higher in the wake of yesterday’s ECB press conference in which Mario Draghi offered unlimited buying support for shorter term duration periphery bonds. As a result of the ECB announcement rates on periphery debt continued to fall with yields on Spanish 10 year bonds dropping another 32 basis points to trade at 5.69% well below the 6% level and markedly lower than the 7% rate that they were yielding just a few months ago.

The sharp decline in risk premia in the EZ sovereign debt has a dramatic impact on EURCHF pair which has been moribund at the 1.2000 peg for the better part of this year. EURCHF saw a vertical move in early morning European trade taking out the 1.2100 barrier for the first time since January of this year. The market is ripe with rumors of SNB upping its peg towards the 1.2200 level, but so far Swiss officials have made no explicit statement as to that speculation. However, the sudden move the lower in periphery rates has clearly reduced the risk of fracture in the EZ and as such has minimized much of the rationale for EURCHF short.

Therefore the complacent EURCHF shorts which have been sitting quietly in the pair waiting for it to break the 1.2000 peg have started to cover their positions contributing to the ongoing short squeeze in the pair for the second day in a row. Whether this rally is sustainable remains to be seen and will most likely depend on the continued improvement in the EZ sovereign debt yields. However, after months of flat lining EURCHF has finally seem volatility revive as the pair once again becomes the proxy for the EZ convergence/divergence trade.

Adding to the overall sense of investor optimism was the announcement from China that the country will allocate another 100 Billion dollar to a new stimulus plan designed to upgrade the infrastructure including highways, water treatment plants and additional rail lines. The news pushed the Shanghai higher by more than 3% as investors bet that the new plans would help revive economic activity in China.

Finally, eco data from the region also helped fuel the risk as both UK and German Industrial Production numbers beats forecasts. In UK the IP soared by 2.9% vs. 1.6% eyed – the biggest monthly jump in more than a decade, – while in Germany IP came in at 1.3% vs. 0.2% expected. The significant increase in manufacturing suggests that demand may be stronger than the market thought and may help to keep German GDP in expansionary more despite the challenges posed by the sovereign debt crisis.

With focus squarely on ECB actions the NAFP report scheduled for 12:30 GMT today has been relegated into the unusual position of being an afterthought. Given the positive readings from ADP and ISM Services report market expectations have inched up with consensus looking for 125-150K new jobs. If the number come in around those levels, the risk rally is likely to continue as investors begin to bet on rebound in global growth into the close of the year. However, if NFPs miss to the downside volatility could return with a vengeance and could quickly erase the recent rally in USDJPY pushing back towards the 78.00 figure.

Boris Schlossberg
Managing Director

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