– FX traded sideways, Asian equities down 0.2-1.5%
– US non-farm payrolls likely to surprise lower
What to watch for today
USD: Payroll to disappoint? Our economists expect today’s non-farm payrolls report to continue the recent run of “bad-but-not-necessarily-recessionary” data. They forecast below consensus prints of +5K for the headline payrolls number and +40K for private payrolls, due to a telecommunications strike during the month. Excluding the strike, the data would read 50K and 85K respectively. This would be a reversal of last month’s surprise improvement to 117k after two prior months in the 50k range. We expect a flat workweek, which would translate into a 0.1% labor income gain, but risks are to the downside. Even a 0.1 drop in hours is equivalent to losing 320k jobs from an income perspective.
Numbers in line with our estimates would certainly not be bad for risk. However, the prospect of new Fed action in September is providing a bit of cushion against weak numbers for risk-sensitive currencies, particularly those not geared directly to US growth. It would likely take an outright negative payrolls number on a post-strike basis to damage risk sentiment significantly, in our view.
What happened overnight
FX traded sideways, Asian equities fell before non-farm payrolls tonight. EURUSD is trading near late New York levels of 1.426. AUDUSD fell slightly to 1.07 while the USDJPY is stable around 76.9. Similarly, Asian currencies traded in tight ranges vs the USD. The exception is the INR, which rose 0.4% vs the USD to 45.9 after returning from a two-day bank holiday. Asian equities are lower by 0.2-1.5%.
The sharp drop in EURCHF over the past several days implies a need to rethink scenarios for G10 FX, in our view. We think the risk of the Swiss National Bank establishing a formal floor for EURCHF would rise sharply if the pair breaks below 1.10 with momentum. This would likely prompt the market to scramble to find alternative store of value hedges to euro area risk, with the JPY and the GBP the most obvious candidates because of their size and liquidity, but also with some pressure spilling over into pressure for EURUSD downside. We think that if the SNB were to establish a floor, it would likely do so at or above 1.20 on EURCHF. Putting this all together implies potential for CHFJPY to drop and GBPCHF to rally. Alternatively, if a Swiss floor does increase pressure on EURUSD then EURJPY and EURGBP should fall.
JPY: New finance minister. Prime Minister Noda has named Jun Azumi as his new finance minister. Azumi is the former head of parliamentary affairs for the ruling party and comes from Ishinomaki, a costal city devastated by the tsunami earlier this year. Azumi has little background in economics or finance and little is known about his thoughts on exchange rate policy. This implies direction may come from the prime minister, at least initially, and potentially suggests a larger role for Japan’s bureaucracy in policy making.
SGD: Higher inflation trajectory. Singapore’s central bank (MAS) said late yesterday that inflation will likely remain above 5.0%yoy in the next few months on higher rental and car prices. This suggests that the current 4%-5% inflation forecast for 2011 would need to be revised up again, barring a global recession. We remain of the view that the MAS would have to maintain the current 5.5%-6.0%yoy SGD NEER appreciation even as external growth slows. We recognize the rising risk of a recession in US and European growth, but believe that the MAS is only likely to shift to a neutral stance and not depreciate the SGD given structurally higher inflation. We remain short USDSGD in our cash recommendation portfolio.
What to read today
– EUR: European Strategy and Trades. Our European interest rates strategy team reiterated their call for lower rates despite their low levels. The growth outlook has deteriorated further, and the political and financial situation in Europe remains highly uncertain. They also suggest buying 30Y Bunds and paying fixed in 30Y EUR swaps. See report here.
Click here to read the full report:
http://www.easyforexnews.net/wp-content/uploads/2011/09/document-804380740.pdf
Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS