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Morning Adviser Europe 9/3/2010 6:09:00 AM
Payrolls Awaited
By Geoffrey Yu
The market is focused on payrolls today after a quiet overnight session where data and news releases were fairly limited. Major Asia-Pacific markets were stable to marginally positive as expectations for the US unemployment report have improved somewhat after recent associated releases. On the whole, US data released yesterday were also better than expectations, with initial jobless claims ticking down from 478k to 472k and July pending home sales rising 5.2% m/m. Fed-speak today did not include any outlook on the economy or monetary policy. The US August payroll report is Friday's main event. The focus will once again be on the private payroll figures, as layoffs of temporary Census workers will weigh on total payrolls. Our US economists are a bit more optimistic than the consensus forecast. Our US team expects a headline reading of -70k for August nonfarm payrolls and a reading of +75k for private payrolls. The consensus expects -100k for headline nonfarm payrolls and +43k for the change in private payrolls. If the private payroll component exhibits another muted gain, then that result is unlikely to provide the market with much direction and G10 currencies will remain stuck in current ranges. Ahead Friday, the Non-manufacturing ISM is also released. EURUSD traded 1.2812-1.2835 and USDJPY 84.17-84.43.
Research Spotlight Will US Payrolls Trigger Risk Seeking? UBS G10 FX Strategy In thinking about risk rally triggers, either the Fed resuming quantitative easing or the US data stabilizing/starting to emerge from their recent slump are two possibilities. The payroll report is a key indicator of how the US economy and Fed monetary policy will proceed. Our US economics team expects a reading of +75k for private payrolls. If private payrolls surprise to the upside, CAD could be the $-Bloc currency that is most positively affected and JPY and CHF would weaken as markets become less risk averse. Conversely, a negative surprise would benefit JPY and CHF vs. USD. CAD would be negatively affected by a downside surprise. Please see the Talking Point "Will US Payrolls Trigger Risk Seeking?" on www.ubs.com/fx for details.
EUR Targets: EURUSD 1m 1.2800, 3m 1.1500 In his press conference, as expected, Trichet announced that the ECB would continue to conduct its main refinancing operations (MROs) as fixed rate tender procedures with full allotment for as long as necessary, and at least until 18 January 2011. The fixed rate tender procedure with full allotment will also remain in use for the special-term refinancing operations with a maturity of one maintenance period, which will continue to be conducted for as long as needed and at least until the end of 2010. Furthermore, the Governing Council has decided to conduct the 3-month longer-term refinancing operations (LTROs) to be settled on 28 October, 25 November and 23 December 2010 as fixed rate tender procedures with full allotment. The rates in these 3-month operations will be fixed at the average rate of the MROs over the life of the respective LTRO. The ECB revised its 2010 GDP forecast from 0.7%-1.3% to 1.4%-1.8%. ECB forecasts revised 2011 GDP forecast from 0.2%-2.2% 0.5%-2.3%. Upward revision for 2010 was unavoidable given strong base effects after Q2 strong data point. The 2011 revision is more interesting, as it shows that the ECB is becoming more constructive on the medium term outlook. While Trichet's comments were a bit more constructive on growth, overall he was neutral, taking care not to signal a significant change in tone Press headlines reported that the EU plans to limit naked short sales of stocks, and government debt, however, no further details were released. Data overnight was broadly firm. Q2 GDP was confirmed at 1.0%q/q, and the annualized figure revised higher to 1.9%. Eurozone PPI was slightly weaker, while gross fixed capital formation and government expenditure all increased on the quarter.
CHF Targets: USDCHF 1m 1.0200, 3m 1.1300 / EURCHF 1m 1.3000, 3m 1.3000 CPI is due today, in Switzerland with the market expecting a flat reading on the month, we expect a slight rise in prices of 0.1%m/m. Q2 GDP was stronger than expected at 0.9%q/q (cons. 0.8q/q), 3.4%y/y, supporting expectations that the SNB could move to a more hawkish track. While CPI has tracked down recently, deflationary risks are not as prevalent as they were previously and continued growth should keep further SNB intervention at bay.
