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Research Note: July 2nd ECB and NFP Outlook
Jane Foley, Regional Research Director
Jacob Oubina, Currency Strategist
Trading Strategy
(July 1, 2009) The press conference from the European Central Bank and the US Employment Situation report are both scheduled for July 2nd, at 0830 ET/1230 GMT. With the expectation that the ECB meeting will be a non-event and that the US nonfarm payroll number will print weaker than expected, the risks seem to be more heavily weighted towards a weaker EUR/USD here. Should the ECB indeed decide to expand its covered bond program (essentially more quantitative easing) the market will view this as dilutive to EUR in the medium term. Moreover, a worse than anticipated NFP number would likely weigh heavily on risk trades and send the USD higher. Remember that the greenback has seen a near 90% inverse correlation with equities in 2009 thus far, so a sharp leg down in stocks should be decidedly dollar-positive. Based on this view, we would be sellers of EUR/USD going into the 830am ET events. Should EUR/USD still be trading well above the 1.41 zone, we would expect a dip back through there would see losses accelerate, with potential for a revisit to the 1.40 recent lows. Given the potential for thin trading as the US Independence Day holiday approaches, we would advise traders to keep stop-losses tight.
ECB focus to remain on enhanced liquidity provision
Eurozone inflation has turned negative; June CPI registered a decline of -0.1% y/y well below the ECB's 2.0% target. No policy change is expected from the ECB at its July 2 policy meeting. However, in view of speculation that inflation could remain negative for months, the focus of ECB policy can be expected to remain on enhanced liquidity provision.
In total, the ECB last week lent EUR442 bln in its first one year tender. It may seem inevitable that the sheer size of the liquidity injection should enhance credit availability within the broader economy but previous efforts made by the ECB to promote liquidity have not had the desired impact. The ECB this week reported that Eurozone M3 data rose by 4.5% in May (three-month average) below the 5.2% increase registered in April and well below the 8.2% average rise registered during the past six years. ECB data also show that the annual growth of credit extended to the private sector declined to 3.1% in May from 3.7% in April.
The ECB also announced in May that it plans to buy EUR60 bln covered bonds (due to commence in July). More detail on these purchases may be made available on July 2. However, the size of the plan is small and is unlikely to have any significant EUR impact. The ECB is likely to recognize that economic conditions are stabilizing, though its tone will likely remain cautious. The lack of credit availability remains a prime concern and it feeds the risk that growth will not reappear in the Eurozone until 2010. Consequently, there is little danger of the ECB reigning in its preparedness to inject further liquidity. In tune with the ECB's anti-inflation credentials, the ECB may make another reference to exit policies though this will likely be along the lines of comments made by the ECB's Stark last week suggesting that the measures adopted will be unwound swiftly and the liquidity absorbed when macroeconomic conditions improve. The ECB may also make the point that it considers the current position of interest rates 'appropriate'. This would be taken by the market as a signal that there will be no change in rates at the ECB's August 6 policy meeting.
Payrolls poised to disappoint
We are looking for a below consensus -410K decline in US nonfarm payrolls for the month of June after a -345K print the prior month. The market estimate is currently -365K and so we are looking for a considerable downside surprise here. For one, we believe the speed of improvement in the latest report, when payrolls dropped -345K after shedding -504K the prior month, was exaggerated and thus we are due for a bit of a bump lower here. Other indicators such as jobless claims and the employment sub-components of industry surveys have improved just modestly, suggesting a decline in employment closer to the -400K level. Private payrolls fell -473K according to ADP and if we take into account that this metric has over-predicted the decline in total NFP by about -50K over the last six months, this points to an NFP of around -425K. The wildcard in the report will be government hiring with regards to the census. Market participants expect the decline to be roughly -50K from this anomaly but anything beyond that could make for an even uglier headline print. We are a touch more aggressive on the unemployment rate call as well, looking for a jump to 9.7% from 9.4%, while the market has settled on an increase to 9.6%.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
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