7/7/2006 2:20 am: EUR/USD..1.2772 USD/JPY..115.14 GBP/USD..1.8364 USD/CHF..1.2287 AUD/USD..0.7463 USD/CAD..1.1118
4:30 am German May Industrial Production (exp: 0.6%, prev: 1.6%) 7:00 am CAN June Net Change in Employment (exp: 10.0K, prev: 96.7K) Canada June Unemployment Rate (exp: 6.2%, prev: 6.1%) 8:30 am U.S. June Average Hourly Earnings (exp: 0.3%, prev: 0.1%) 8:30 am U.S. June Unemployment Rate (exp: 4.6%, prev: 4.6%) 8:30 am U.S. June Net Change in Employment Payrolls (exp: 140K, prev: 75K)
The markets anticipate today's U.S. June non-farm payrolls report, which is expected to show an increase of 140,000 in payrolls, a 0.3% increase in average hourly earnings and 4.6% in the jobless rate. But the report could be setting the dollar for a downside surprise after the ADP report revealed a 368,000 surge in private payrolls for June, more than triple the prior reading of 122,000. Although the ADP report has now lifted consensus forecast for Friday's non-farm payroll release to 160,000 from 155,000, many private forecasters are penciling in an increase of 220,000 to 250,000.
Considering that June non-farm payrolls are slated to show an excessively strong figure as a payback to May's excessively weak figure, and with the ADP number surprising to the upside, we believe the risk for the dollar has become slanted mainly to the downside as there stands greater room for disappointment than for upside surprise after the release.
The dollar reaction will be determined by a combination of the payrolls figure and the average hourly earnings. A durable dollar rally could only be necessitated by a payrolls figure of at least 250,000 to 260,000, especially if the average hourly earnings rise by at least 0.3%. A payrolls figure between 200,000 and 240,000 could be expected to have a muted dollar reaction, and could even end up negative in the event of earnings growing by less than 0.3%. Any figure below 190,000 in payrolls is likely to be dollar negative because FX traders are already positioning for an assured European Central Bank (ECB) rate hike in August and an increasingly likely Bank of Japan (BoJ) move next week, while a Fed rate hike would not be assured after today's jobs report.
The crucial role of the average hourly earnings component reflects the inflationary signs of the job market, which are a concern for the inflation-fighting Federal Reserve. We would not deem the payroll component to represent a meaningful reflection of economic activity in the event of a strong figure for the sole reason that the report is slated to be a payback for an extremely May report.
The slowing U.S. economy has started to show more lucid signs after Thursday's release of the U.S. services ISM showed a five-month low at a worse than expected 57.0 in June from May's 60.1. The employment index also hit a five-month low at 52.0 from May's 58.0, while the price paid index fell to 73.9 from May's 77.5, which was the highest level since September. This week's release of the June manufacturing ISM of 53.8 was the lowest since the Hurricane Katrina lows of August 2005. That figure was the lowest since May 2005. The growth argument for holding interest rates unchanged is widely present. The Fed has four weeks to determine whether the inflation argument remains valid for pushing rates to 5.50% next month.
Euro awaits payrolls on steady Trichet foundation ECB Chief JC Trichet's explicitly hawkish press conference offered the euro with a vital foundation, lifting it to 1.2780 from the 1.2730s and dispelling speculation on whether the ECB will wait for the end of the quarter to deliver its next rate hike. Using the key terms "strongly vigilant" sufficed in signaling an August move to the markets. A 25-basis point tightening in August to 3.00% is likely to be followed up by at least one more move this year, which is an essential source of euro vitality. Aside from the inflation and liquidity arguments to further ECB policy tightening, the positive growth evidence make a potent case for raise rates to at least 3.50% by year-end.
EUR/USD technicals show a positive MACD positioning in the intraday charts, suggesting a break above the 1.28 to 1.2820. We could see 1.29 today in case of a payrolls figure lower than 130,000 as that would come in well below the suggested 368,000 forecasted by the ADP report. But the daily chart suggests short-lived gains around 1.28. Downside limited at 1.2720. Only a payrolls figure greater than 250,000 would drag the pair to 1.2660.
Yen steadies as BoJ and government officials waltz around interest ratesJapanese finance officials remain persistent in voicing their support for maintaining interest rates at 0%. After yesterday's remarks from Vice Finance Minister Hosokawa indicating his preference for the Bank of Japan to keep its 0% interest-rate policy for the time being to assure winning the fight against deflation, Finance Minister Tanigaki echoed those same remarks on Friday. Tanigaki said concerns about inflation remain low just one day after BoJ governor Fukui indicated the central bank's report stating that: "almost all regions continue to be in an expansion or recovery trend" in Japan.
Today, Tanigaki resorted to the North Korean missile issue urging the central bank to: "thoroughly debate on how recent missile tests may affect the markets and then carefully make a judgment.” Japan's daily newspaper Sankei reported that Japanese and U.S. defense officials have concluded that the Taepodong-2 had targeted Hawaii, after analyzing data collected from their intelligence equipment. The newspaper quoted unidentified Japanese and U.S. government officials but neither country confirmed the story.
Testing the 114.90 foundation, USD/JPY could call up 114.65. Key support stands at 114.20. The technical picture suggests tepid force to the upside, with 115.40 and 115.75 limiting the gains.
