FX Daily Strategist: Europe

The USD continues to come under pressure following yesterday’s disappointing US payroll employment report. With payrolls rising just 148k and the 3-month moving average falling to 143k, the overall tone of the report was soft and provided market participants with little scope to rebuild expectations for near-term Fed tapering of asset purchases. Other data released Tuesday also highlighted USD vulnerability, with the August TIC portfolio flow report continuing to show foreign investors cutting exposure to US equities. The USD lost ground broadly after the labour market report, most notably against higher yielding

currencies. The markets increased confidence that Fed tapering will not occur until Q1 of next year is providing a good backdrop to re-enter carry positions, and we expect the higher yielding commodity and EM currencies to extend gains in the near-term. The USD is also increasingly vulnerable vs. the lower-yielding European currencies and the yen, and we were stopped out of our short EURUSD recommendation following the release. But with ECB and BOJ monetary policy expected to lean against currency strength and the market already running a short USD position, we think the USD will stabilize and recover vs. core FX in the near-term. We remain focused on ECB speakers, watching for evidence of increased discomfort with EURUSD gains.