- Greek PSI+ aside for now with NFP report on the schedule today
The risk-on rally lost some steam by the end of the NY trading day with US equities ending the day basically flat while USD strengthened against most of G10 FX; Asian markets have settled into the usual pre-NFP lull. The official Chinese services PMI slid on weaker construction but the seasonally-adjusted HSBC version held at last month’s levels. European Services PMIs today should continue to reassure that the steepest part of the contraction is behind us, but ahead of NFP there will be little incentive to add to risk positions. In the meantime, we continue to wait for clarity on the Greek PSI+ talks. EU commission Olli Rehn announced yet another deadline on the Greek PSI talks, this time by the end of this week, but comments from the Greek finance minister indicate that a number of important issues remain unresolved. One of these appears to be the issue of official sector participation: though the private sector holds the majority of Greek debt, some form of official sector participation is evidently required in order to achieve the much vaunted ‘120% by 2020’ debt/GDP ratio. If the ECB were to agree to take a haircut beyond the discounted purchase price of their SMP holdings, this would result in capital impairment requiring recapitalisation. Any perception of loss of ECB independence in such an event would weigh negatively on EUR – but the ECB is likely to resist fiercely such a move. For the NFP report, our economists look for +125K (vs.145K BBG median), which would be consistent with solid underlying hiring trends but would not bring the unemployment rate materially lower. As re-emphasised by Fed Chairman Ben Bernanke yesterday in testimony before Congress, the US has a long way to go before the jobs market can be considered normal.
- Likely improvement in UK services PMI will not change our view for more BoE QE next week
Besides NFP, US non-manufacturing ISM will also be released Friday. We expect an increase reflecting the pick up in the retail sector and a generally better economic sentiment. This should prove positive for risk and boost commodity currencies in particular. Meanwhile, the UK PMI Services will likely point to improving service sector activity albeit at a moderate pace, forecast to come in slightly higher in January (54.5) vs. December (54.0). With the services sector comprising over 70% of the UK economy, a bounce should be GBP supportive. But better services PMI will not play down our expectations of the BoE going through with yet another round of QE next week. BoE’s arch dove Posen explained that there is a case for another 75bn in stimulus – which is indeed what our economists expect to be announced.
- SNB to staunchly defend the floor; Canadian employment to improve.
As EURCHF continues to trade near the 1.20 floor and real exports surged in the month of December, noise from SNB’s Jordan escalated on Wednesday. The acting president reiterated the central bank’s commitment to the EURCHF 1.20 floor and willingness to do defend it at all costs. A test of the SNB’s resolve by the market is likely to fail in our view. A resolution on the Greek PSI+ talks coupled with the continued determination of the SNB to the floor should provide the catalyst for EURCHF higher. In Canada, we see a small bounce in the January payroll numbers from 17.5k in December to 20k in January which is overall in line with consensus (22k). Nevertheless, this is unlikely to affect the employment outlook since the economy has only added 7.4k jobs over the past six months. While a weak number may weigh negatively on CAD, a resolution on Greek PSI and better NFP numbers will be the key factors to drive CAD. Despite weak data out of Canada, USDCAD has fallen below parity largely because of a very dovish FOMC and the improving risk sentiment.
BNP Paribas