– All eyes on US employment report; an upside surprise could result in a risk-off reaction
Better than expected data out of the US left markets trading with a risk off tone, although commodity currencies continue to trade well. Consensus was looking for ISM manufacturing to fall into contraction territory, but it managed to hold up above 50. However, the components of the ISM suggest a less rosy picture of the economy, with new orders falling further into contraction territory and the employment component slipping; the latter is a good indicator for NFP. BNP Paribas is looking for +50k vs. a consensus of 68k for today’s key print. We see a strong number as USD positive, implying as it does less chance of the Fed pulling the QE trigger. The converse is also true – up to a point: a shockingly weak number could provoke further risk aversion. In this case, the FX market will likely take its cue from the reaction of equities.
– New Japanese cabinet make-up suggests PM Noda to trade gravitas for control
With party heavyweight Okada apparently turning down the Finance Minister post, PM Noda has reportedly opted for a relatively unknown by the name of Azumi. His choice of Economics Minister, Furukawa, also appears a relative lightweight. While this may allow Noda more control over these key ministries, he risks his efforts at fiscal reform lacking sufficient weight behind them to succeed. For FX, the implications are that at least in the short term the Noda approach to FX intervention remains in place. Longer term, failure to progress on fiscal reform threatens further downgrades from the ratings agencies, but previous downgrades have been shrugged off by the bond and currency markets. More important perhaps is that the BoJ is unlikely to adopt any significant easing measures without signs of progress on the fiscal front.
– EUR faces potential downside in the coming month; watch Italian bonds today
Despite the Fed’s dovish shift since Jackson Hole, EURUSD is lower as bailout concerns resurface. But as noted yesterday, we are only at the beginning of a likely tough month for the EUR. The ECB’s Nowotny noted yesterday that Italy’s austerity plan was of great concern; this morning Trichet has added to the pressure, saying that it is ‘of extreme importance’ that Italy fully confirms and implements the austerity measures announced on August 5. Such scrutiny of the Italian austerity plan may result in pressure on Italian bond markets today if markets opt to check on the ECB’s resolve.
– UK economic data continues to underperform; sell GBPCHF
Meanwhile UK data continues to highlight the weakness in the economy. Today’s PMI construction data is expected to hold up above 50, but should subside slightly from the previous month. The real focus will be on the PMI services number on Monday, but the data is further tipping the scale for more QE by the BoE, which we expect in November. With the markets pricing in only a 30% chance of QE, we expect GBP to take a hit as the BoE becomes more dovish. Thus, we recommend selling GBPCHF, targeting a move to 1.20.
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BNP Paribas
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