Ecofin, ECB, US jobs report in focus

The USD index remains close to its recent highs, maintaining a positive tone amid elevated risk aversion. Data releases have tended to take a back seat to events over recent weeks, but this week the all important US September jobs report may provide the bigger focus for US markets. The consensus expectation is for a 50k increase in payrolls and the unemployment rate remaining at 9.1% an outcome that would do nothing to assuage US growth worries. As usual markets will gauge clues to the jobs data from the ADP jobs data and employment components of the ISM data but an outcome in line with consensus expectations will likely keep risk aversion elevated and the USD supported unless the data is so bad that it results in an increase in expectations for Fed QE3.

There will be plenty of attention on the Ecofin meeting of European finance ministers today especially given that much of the reason for the stability in markets recently is the hope of concrete measures to resolve the crisis in the region. In this respect the scope for disappointment is high, suggesting that the EUR is vulnerable to a further drop if no progress is made at today’s meeting. While the extent of short market positioning has left open some scope for EUR short covering the absence of any good news will mean the impetus for short covering will diminish.

While attention in Europe will predominately remain on finding a resolution to the debt crisis and the saga of Greece’s next loan tranche, the European Central Bank (ECB) meeting will also be in focus this week especially given expectations that the ECB will cut interest rates. While hopes of a 50 basis points rate cut may have taken a knock from the firmer than expected reading for September flash CPI released at the end of last week the EUR could actually react positively to an easing in policy given that it may at least help to allay some of the growing growth concerns about the eurozone economy. However, any EUR will be limited unless officials in the eurozone get their act together and deliver on expectations of some form of resolution to the crisis in the region.

Strong words from Japan’s Finance Minister Azumi failed to have any lasting impact on USD/JPY. Japan will bolster funds to intervene in currency markets by JPY 15 trillion and extend the monitoring of FX positions until the end of December. Japan did not intervene during September but spent around JPY 4.5 trillion in FX intervention in August to little effect. For markets to be convinced about Japan’s conviction to weaken the JPY it will require putting intervention funds to active use, something that doesn’t seem to be forthcoming at present. A factor that may give some potential upside momentum for USD/JPY is the slight widening of US versus Japan bond yield differentials over recent days, which could finally result in a sustained move above 77.00 if it continues into this week.

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