– NFP likely to come in below 100k for the second straight month
With the ECB behind us, the US employment report will dominate markets on Friday. Price action in Asia has continued to remain risk-on with the Asian currency index (ADXY) breaking key levels and now opening the way for the YTD high (118). Ahead of the NFP, moves could slow down and with EURUSD likely consolidating within 1.2950-1.3050. Noticeably, the EUR part of the EURUSD equation has come back to dominate in recent days with a number of EUR crosses moving higher (EURGBP tracking EURUSD higher). However, today’s NFP could shift the focus once again on the USD, with GBPUSD likely to instead track EURUSD higher, keeping EURGBP range bound. In fact, we have added to our short USD positions by initiating our long GBPUSD recommendation following the recent pullback (entry 1.6140, targeting 1.68). On NFP, our economists forecast 75k (below the 115k consensus). Such a reading would be the second straight month and would reaffirm the Fed’s aggressive easing policy. However, a stronger print may not see the USD strengthen on other crosses, with the USDJPY an exception given its sensitivity to US yields. The stronger US data released earlier still resulted in riskon and USD weakness on a number of crosses. This seems reflected to the message that the Fed will be easing policy in an open-ended manner until there is a sustainable improvement in the labour market (e.g. unemployment rate moving below 6%). Accordingly, we would not expect a stronger reading to result in a risk-off reaction. Yesterday’s FOMC made this clear, explaining that most risks associated with QE3 could be managed and at the end of the day, overall the benefits outweigh the costs.
– BoJ meeting a non-event ; NFP more important for USDJPY
The BoJ left policy unchanged as expected, leading to some very mild JPY comeback on the crosses, though minimal reaction in relation to the JPY sell-off accompanying last month’s JPY 10trn easing. However the CB cut its economic assessment for the second straight meeting now stating that “activity is levelling off more or less”. The statement showed more concern over the deceleration in overseas growth and on JPY strength. But today’s US employment report will likely be more important for USDJPY. A number below 100k should drive USDJPY lower. As USDJPY continues to grind lower, verbal intervention from Japanese policymakers will increase, but the impact on the JPY will be short lived. As we have noted in the past, the BoJ will have to be more aggressive than the Fed to weaken the JPY against the USD.
– Focus shifts to Monday’s Eurozone finance ministers meeting
The ECB meeting came and went with no real surprises. The assessment of the economic situation in the press conference statement was similar to the previous month except that the ECB asserted their concern over inflation. Still, our economists continue to call for a 25bp cut, but the risk of a delay has risen. The December ECB staff inflation projection for 2014 will be crucial. On the OMT, Mr. Draghi reiterated his stance that the ball is in the politicians’ court. The Eurozone finance ministers meeting on 8 October is the next focal point ; ministers are set to discuss Spain’s 2013 budget, structural reforms presented and the likely conditionality of any aid package. We do not expect Spain to request aid as early as Monday, but it seems that Spain is inching one step closer. We stay EUR constructive as sovereign risk premia further abates.
– CAD to find support from its employment report
The Canadian employment report will be a sideshow in light of the release of the US employment report. We expect 10k for September, which is much below the previous month’s 34k increase. With the Canadian economy continuing to add jobs, the CAD should find support. We particularly favour the CAD against the USD and the AUD. Heading into 2013, the CAD is likely to be the outperformer among the commodity bloc. As Fed policy buffers the US economy, the Canadian economy will become a key beneficiary of the improvement in the US.
BNP Paribas