Major Overnight Headlines
• Euro Area Sentix Investor Expectations Index back at 2006 levels in September but fundamentals remain weak
• BoE’s Fisher tells UK weekend press BoE has “no plans” to raise rates, Sunday Times
• Japan Q2 GDP revised up to 3.8% annualize from 2.6%; private cons. and exports each add 0.4% to QoQ rate
After last week’s NFPs, we think financial market participants can be broadly separated into 2 parts: those still looking at NFPs on the one hand, and those looking through NFPs on the other. In keeping with our economists’ views on Fed policy and the US economy, we’re inclined to place ourselves firmly within the latter category, but we think the split at present has been one of the reasons why the value of the USD has lacked a clear direction to start the week.
The aforementioned split has probably originated in the US data. On the one hand, most forward-looking indicators including the ISM indices point to continued, moderate growth ahead for the US as the rebound from the fiscal sequestration and general underlying strength continue to take root. On the other hand, the decline in the unemployment rate has been based on lower and lower participation rates. This leaves room for either: 1) a higher unemployment rate further out as labour market participation increases or 2) a reassessment by the Fed of its “soft” target for the unemployment rate in relation to when it is likely to end QE3 (currently around 7.0%). As such, the outlook is not straightforward, and last week’s NFPs print has certainly contributed to this fact.
Leading into further US data later this week, we suspect that there will be room to fade rallies in the EUR against something – maybe one currency or maybe a host of currencies at once. Along these lines, we think there is money in EUR/AUD, EUR/NZD and EUR/CAD. Additionally, rallies in EUR/GBP should be capped below 0.84500 in the run-up to UK labour market data on Wednesday. The EUR should therefore remain a “sell on rallies” with the pair below the aforementioned level. We’d keep away from shorting EUR/USD aggressively until the next batch of US data is out of the way.
Read the full report: FX Daily
BMO