Talking Points:

FX Markets to Look Past European Calendar, Focus on US Jobs Data
Leading Indicators Hint Nonfarm Payrolls May Surprise to the Upside
European FX to Underperform Against US Dollar on Pro-Taper News

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Traders are likely to look past a lackluster economic calendar in European trading hours to focus on the much-anticipated US Employmentreport. Expectations suggest the economy added 197,000 jobs in December, marking a slight slowdown from November’s 203,000 increase. The Unemployment Rate is forecast to hold unchanged at 7 percent, a five-year low.

A Citigroup gauge tracking the performance of US economic news-flow relative to expectations is sitting at a two-year high, hinting that analysts continue to underestimate the resilience of the North American giant. That opens the door for an upside surprise. The latest set of ISM figures showed the pace of hiring accelerated in both the manufacturing and services sectors in December while the ADP Employment reading topped forecasts, reinforcing possibility of a rosy result.

This raises a critical question: does the US Dollar have room to advance if jobs data bolsters the case for continued “tapering” of the Fed’s QE program, or have investors already adequately priced the new status quo into asset prices? The most yield-sensitive currencies in the G10 FX space – notably the Australian Dollar and the Japanese Yen – have moved in lock-step with a rally in 10-year Treasury yields, reflecting the impact of the Fed’s changing policy trajectory. The European majors – namely the Euro, British Pound and Swiss Franc – have not shown the same dynamic.

Europe’s leading central banks now stand on the dovish side of the policy spectrum relative to the Federal Reserve. As the FOMC embarks on the process of scaling back accommodation, the SNB and BOE are locked in place while the ECB seems to be gearing up for further easing. That hints that while the likes of the Aussie and the Yen may not see strong downside follow-through, the European FX space has some catching up to do and may face outsized losseson taper-supportive data. We remain short EURUSD.

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