US Dollar Retreats as Currency Markets Set Sights on Nonfarm Payrolls Data

Key Overnight Developments

• Euro, British Pound Bounce as Markets Reposition for NFP Report
• Japan Developing New, Budget and Yields Neutral Stimulus Plan

Critical Levels



The Euro consolidated in a narrow range while and the British Pound coiled up into a consolidation wedge in Asian trading, but both currencies spiked sharply higher just ahead of the opening bell in Europe as currency markets repositioned in preparation for the upcoming release of the US Nonfarm Payrolls report. We remain short GBPUSD at 1.6648.


Asia Session Highlights



Japanese officials took to the wires once again in Asian trading as Prime Minister Yukio Hatoyama prepares to unveil a new stimulus spending plan allegedly worth as much as 4 trillion yen. Finance Minister Hirohisa Fujii said the money for the plan will largely come from funds diverted from the previous government’s infrastructure projects and re-directed to social welfare, green products, and child-care subsidies, assuring investors that it will not compound the already massive budget deficit or boost borrowing costs. Chief Cabinet Secretary Hirofumi Hirano added that the government has no plans to fund the new stimulus effort or the deficit by selling any of its holdings of US Treasuries. However, the final announcement may get pushed back as ruling coalition partners the Democratic Party of Japan (DPJ) and the People’s New Party (PNP) are apparently at a disagreement about the size of the package, with PNP chief and Financial Services Minister Shizuka Kamei push for a 8 trillion yen final figure.


Euro Session: What to Expect



Switzerland’s Consumer Price Index is the only notable item on the docket, with expectations calling for inflation to decline at an annual pace of -0.1% in November, the smallest negative reading since deflation emerged in March. Higher commodity prices, particularly those for energy, are the likely catalyst behind the moderation. The outcome is unlikely to have much of an impact as the persistence of shrinking prices (albeit at a slower rate) makes unlikely any near-term changes to monetary policy, with the Swiss National Bank committed to an extremely loose approach that includes quantitative easing and FX market intervention should the Franc strengthen to the 1.50 level against the Euro.

On balance, all eyes are likely to be focused on the release of the US Nonfarm Payrolls report late into European hours. Expectations suggest the world’s largest economy shed 125,000 jobs in November, the least since March 2008. However, we learned yesterday that the non-manufacturing sector unexpectedly shrank in November. Services account for close to 80% of US employment, so a downside surprise is not out the question.

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