Is the Euro poised for a boost from U.S. employment?

The euro is pushing its luck with the dollar even ahead of the critical employment report due out later this morning. Having touched $1.2854 already this morning, the euro is teetering on a surge to perhaps $1.2925 if today’s jobs report softens the perceived need to hold dollars on safety grounds. That aside, the euro seems to have several other tailwinds boosting its appeal at the moment.

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Euro – The ECB shifted its growth outlook for 2010 for the Eurozone raising its forecast range to between 1.4% and 1.8%. The recent performance of the Eurozone economy has been stellar and surprised most. However, the headlines have been stolen by the gloomier outlook for the world’s largest economy meaning that despite the widening of growth rates between the two economic regions, the dollar has outflanked the euro on safety grounds. In addition, investors also took a dim view of the euro on the expectation that an American slowdown would filter through to the Eurozone eventually. The euro’s recent resurgence to $1.2850 reminds us that this rather simplistic version of events is perhaps premature.

Once again Eurozone data has bucked the trend and remains firm. Not only did this week’s PMI manufacturing data refute the view that the Eurozone is following the U.S. lead downwards, but today’s PMI services report also reinforces the view that Eurozone activity remains independently robust. Data for retail sales throughout July showed a third monthly gain with sales rising 0.1% while a back-revision boosted the yearly pace of gain to 1.1%. The euro also rallied against the yen to stand at ¥108.42. If Friday’s payroll number gives U.S. economists cause to breathe a sigh of relief, the euro’s improving underlying data points could see it head back above $1.2900 ahead of the weekend.

British pound – Although the British pound might have its fiscal house in better standing than that of the Eurozone, fears over the impact of such a stringent stance continue to take a toll on sterling. Today’s PMI services report shows a comparative underperformance relative to continental Europe with a dip in the reading to a below forecast 51.3 and close to indicating neither expansion nor contraction for the sector. As a result, investors are having a hard time justifying a long position either against the dollar or euro. Earlier in the day the data tipped the pound lower to $1.5389 before it could recover to $1.5408. Against the euro the pound weakened to 83.32 pence.

Aussie dollar – The Aussie continues to bubble under despite a slight cooling in risk appetite. Investors are either gearing up for a new wave of yield-grabbing, which would push the Aussie above its recent 91.25 cent peak against the greenback, or it’s only a matter of time before the wave recedes leaving the world back at square one. The Australian services sector continues to display signs of contraction albeit at a lesser pace. The Australian industry group’s services PMI released for August showed a rise in the index to 47.6. The Aussie rebounded from overnight weakness to 90.66 cents to 91.00 cents ahead of U.S. data later this morning.

Japanese yen – Further saber-rattling from the Ozawa challenge to Prime Minister Kan’s leadership later this month unseated the yen overnight. Mr. Ozawa continues to shout louder about the need to see through an interventionist policy to alleviate pressure on the exporting sector. His overture is being heard and the yen fell against the dollar to ¥84.45.

U.S. Dollar – After a strengthening in data series depicting consumer resilience to the new higher plane for unemployment, investors are finding fewer reasons to maintain a long dollar position solely on safety grounds. The fact that the U.S. economy is likely to avoid a secondary contraction is fast-removing the desire to hold dollars as a safe haven. Economists are looking for a net loss of jobs during August of 105,000 with a net gain across the private sector of around 40,000. No matter what the outcome today, investors won’t be in any mood to change their projection of when the Fed will raise monetary policy. A glowing report today would merely shift yields up a notch but that might still alleviate demand for dollars. The dollar index is unchanged ahead of today’s report at 82.38.

Canadian dollar – A global rout for stocks during August and a surge in demand for safety left the Canadian dollar bruised last month. Its close relationship with the greenback assured that it felt the full impact of a sharp freeze in risk appetite. The Bank of Canada convenes next week with the money currently indifferent in its prediction over whether the central bank will conclude a string of rate increases with a further quarter point move that would tie the bow neatly at 1%. Canadian employment data is not due until next Friday.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.
About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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