EURUSD: Will NFP overshadow ECB or Vice Versa?

• EUR vs. Dollar: Will NFP overshadow ECB or Vice Versa?
• EUR: What to Expect from Mario Draghi
• GBP Hits New Highs as String of Positive Data Continues
• AUD: Erases Gains as Trade Deficit Balloons
• CAD: Trade Balance on Tap
• NZD: Hangs Near 2 Year High
• USD/JPY Will Hold 100.75 to 103 Range

EURUSD: Will NFP overshadow ECB or Vice Versa?

It is extremely rare to have the European Central Bank monetary policy announcement and the non-farm payrolls report scheduled on the same day but with U.S. markets closed Friday July 4th, the concurrent timing of these event risks will make for an exciting and active start to the North American trading session. Investors have a good sense of what to expect for both the ECB announcement and non-farm payrolls but if we had to pick the one with the greater chance of catching the market by surprise, it would be the non-farm payrolls report. Having just rolled out a series of new measures last month, the ECB will be focusing on the details at this month's meeting (more on this in the euro section of our commentary). Non-farm payrolls on the other hand are expected to rise by 210k in June, which is approximately the same amount as the previous month. Based on the low level of jobless claims and the sharp rise in ADP today, most investors and economists expect further improvements in the labor market but recent disappointments in growth also raise concerns about the willingness of U.S. corporations to hire. Bloomberg surveyed 80 qualified economists for their non-farm payrolls forecast and it ranges from a low of 160k (from Westpac) to a high of 290k (from Societe Generale) - so it can go either way. NFP could create greater volatility for the EUR/USD than ECB because the report is always subject to revisions. The unemployment rate has also been unusually volatile - moving more than the Federal Reserve anticipated. If there is a surprise improvement or deterioration in the unemployment rate, it could trigger a sizable reaction in the dollar. The current forecast calls for the jobless rate to hold steady at 6.3% but if it improves by even a small amount, it could lead to a recovery in the U.S. dollar. However we think the greenback will have a bigger reaction to a soft labor market report than a strong one because of the Fed's reluctance to back off their dovish monetary policy bias. Unless payrolls rise by more than 300k or the unemployment rate hits 6%, the Fed will brush off the improvement, lament that joblessness remains high and say the slow pace of growth warrants an extended period of low rates. However if payrolls grow by less than 175k or the unemployment rate ticks up, then Treasury yields and the dollar could sell off aggressively as investors view the labor data as another reason to pull back their expectations for Fed tightening. In all likelihood, the EUR/USD will have a benign reaction to ECB and NFP but if there is a surprise, there's a greater chance that it will come from non-farm payrolls.

EUR: What to Expect from Mario Draghi

Last month there was equal focus on the European Central Bank's 7:45am ET announcement and Mario Draghi's 8:30am ET press conference, but this month Draghi's speech should be the only source of volatility for EUR/USD from the ECB. Having only eased monetary policy in June, we don't expect the central bank to announce additional measures especially given mixed economic data since the last meeting. While manufacturing activity was revised lower and Eurozone confidence declined, inflation ticked up slightly, the unemployment rate held steady and the current account surplus increased, making additional policy steps unnecessary at this time. We continue to believe the ECB will wait at least 2 to 3 more months before considering increasing stimulus because they want to give the economy enough time to absorb recent easing. Yet that may not stop Mario Draghi from reminding everyone that they stand ready to boost stimulus if the economy weakens further. The mere notion that the ECB is looking to ease at a time when the next move from the BoE, RBNZ and possibly even the RBA is higher rates could be enough to revive the sell-off in EUR/USD. We expect Mario Draghi to provide details on the announcements made last month. This includes the way the lending benchmarks for targeted LTROs will be calculated, what type of preparatory work they are doing on ABS purchases, if rates could be lowered further like some ECB members suggested and whether they have a preference of private QE versus sovereign QE. While investors will be waiting for answers to burning questions such as these, it may serve the central bank better to provide less detail as they wait to see how the economy performs. Draghi's comments could be bearish for EUR/USD but we don't see the losses extending to 1.35.

GBP Hits New Highs as String of Positive Data Continues

Further improvements in U.K. data drove the British pound to fresh highs against the euro and U.S. dollar. For GBP/USD 1.7177 now marks the currency pair's 5-year high and for EUR/GBP 0.7950 marks the 1-year low. According to the latest PMI report, construction sector activity expanded at its strongest pace in 4 months with the index rising only 0.2 points shy of record levels. It is no secret that the motivation for tighter monetary policy in the U.K. is housing. As shown in this morning's Nationwide House price report, prices continue to rise at a healthy rate, increasing the pressure on the U.K. government to take steps to cool the market. Throughout the month of June investors believed that the Bank of England would signal plans to raise interest rates as early as this year and while they did to some degree the mixed messages from Governor Carney left everyone confused about their level of conviction. However the numbers don't lie and between the acceleration in the manufacturing and construction sectors, investors have enough evidence to solidify their belief that the central bank will be growing more hawkish in the coming months. Economists have also gotten it very wrong, calling for slower manufacturing and construction sector activity. This divergence in views exacerbated sterling's reaction to recent data. While the stronger U.S. ADP report forced GBP/USD to give up part of its gains, if tomorrow's PMI services also beats expectations, GBPUSD could renew its gains and aim for 1.7332, the 50% Fibonnaci retracement of the 2007 to 2008 decline.

AUD: Erases Gains as Trade Deficit Balloons

All 3 of the commodity currencies traded lower against the U.S. dollar today but the steepest losses were experienced by the Australian dollar. Interestingly enough, AUD/USD was the day's worst performer, which compares to Tuesday, when it was the best performer. While the Reserve Bank surprised the market with its lack of renewed dovishness, the latest trade numbers highlight some of the biggest problems for Australia's economy. In the month of May, the trade deficit hit 1.9 trillion, six times worse than expected. The 30% decline in iron ore prices this year is finally catching up to economy, causing the deficit to balloon to its largest level in 18 months. Exports fell 5% in value terms with a large part of that caused by a delayed reaction to the drop in prices. The RBA hasn't raised significant concerns about lower commodity prices and that could be because the data is from May and since then China's economy bottomed. Their demand should help ease the downside pressure on trade activity in Australia. AUD will remain in focus over the next 24 hours with retail sales and the non-manufacturing PMI report scheduled for release from Australia and China. The PMI services index is scheduled for release tomorrow and if activity also contracts, alongside manufacturing it could drive AUD/USD even lower, cementing 95 cents as the top for the currency. Given the broad signs of recovery in China, tonight's Chinese PMI services report will show that service sector activity also improved in the month of June. No major economic reports are scheduled for release from New Zealand but Canada has trade balance. While manufacturing activity slowed in May, the deficit in April caught everyone by surprise so a smaller deficit is expected for May.

USD/JPY Will Hold 100.75 to 103 Range

The stronger than expected ADP report drove USD/JPY higher today but besides this move, there was very little consistency in the performance of the Japanese Yen. Tomorrow's U.S. non-farm payrolls report is important for the Yen because it will impact the market's risk appetite as well as USD/JPY. Thanks to the rebound in U.S. yields we have seen a nice recovery in USD/JPY over the past next 48 hours. Regardless of the outcome of Thursday's U.S. labor market report, we expect the 100.75 to 103 range in USD/JPY to remain intact. The lack of consistency in the performance of the Yen crosses can be partially attributed to the lack of Japanese data overnight. The record breaking moves in U.S. stocks caused the Nikkei to extend its gains but the rally was modest. The Ministry of Finance's weekly portfolio flow report is scheduled for release this evening alongside the services PMI and Composite index.