Euro Inches Higher As Markets Await Payrolls

Traders squared up their positions ahead of US Non Farm payroll data due to be released at 12:30 GMT today and EURUSD climbed back towards the 1.5500 figure after a day of battering yesterday that saw the unit lose nearly 200 points against the greenback. The buck has been strengthening all week on the assumption that the US economy may not be nearly as weak as analysts had previously thought, but today’s NFP report could prove to be the moment of truth that resolves the argument of whether the US is in the midst of a serious recession or simply in a slowdown.

Our pre NFP analysis Will Non-Farm Payrolls Recover provides inconclusive evidence with 6 leading indicators pointing to further deterioration in the labor market while 3 hint at improvement. The NFPs are notoriously difficult to predict for a host of reasons including the birth/death model which makes monthly adjustments to the number as well as the possibility that public sector hiring may have increased in April and therefore mitigated some of the negative effects of the recent spate of private sectors layoff announcements.

Our best guess is that the number today will likely print better than –100k loss and we base that assumption mainly on the improvement in the four week jobless claims average. Nevertheless, the possibility of a surprise either way appears to be quite strong today and the post news reaction may be typically volatile. Therefore as always we prefer to stand down ahead of the number.

In other economic news Australian Retail Sales printed better than forecast rising 0.5% vs. 0.3% expected indicating that the economy Down Under continues to grow at a healthy pace. If the bulls are indeed correct that the worst of the credit crunch crisis is behind us and global economy will continue to expand at 3% pace or better, Australia becomes the strongest beneficiary of such an outcome piggybacking on China’s voracious growth.

While RBA may have ended its rate hike cycle for now, it is unlikely to begin easing if economic conditions in Australia maintain their current levels. If RBA stands still, the Aussie with its 7.25% yield will remain a magnet for global investment flows and AUDUSD could hit parity if global risk environment remains benign.