Why a Weak NFP Could Wreak Havoc for ECB

Market Drivers April 04, 2014

Euro consolidates at 1.3700 ahead of NFPs
German factory orders a bit better
Nikkei 0.05% Europe -.11%
Oil $100/bbl
Gold $1289/oz.

Europe and Asia:
EUR GE Factory orders 0.6% vs. 0.1%
EUR Retail PMI 49.2 vs. 48.5

North America:
USD NFP 8:30
CAD Employment 8:30
CAD Ivey PMI 10:00 AM

It been a typically quiet pre-NFP night in the currency market with EUR/USD remaining essentially lifeless near the 1.3700 for most of Asian and morning European trade. Reported bids by Asian central bank reserve managers have kept the single currency supported after yesterday's sell off during the ECB press conference.

Although Mr. Draghi offered no new policy initiatives, his tone throughout the presser was generally dovish as emphasized that the central bank remained in a highly accomodative mode and that it was prepared to engage in unconventional measures should the EZ economy require such action.

More importantly, Mr. Draghi spoke freely about the prospect of QE - a sign that even the highly conservative Germans may be open to what was once a verboten policy choice. Still the reluctance of the ECB to actually do anything on the policy front, indicates that monetary authorities would clearly prefer for the EZ economy to recover through organic demand rather than any further stimulus action and as long as the EUR/USD rate remains below the key 1.4000 mark, the ECB may be content to remain stationary for the time being.

The economic data overnight continues to back this laissez faire approach as German factory orders rose a better than expected 0.6% versus 0.1% eyed while the EZ PMI inched higher to 49.2 versus 48.5 although it remains below the 50 boom/bust line.

Turning to the marquee event of the week, today's NFPs are expected to print at around the 200K mark and any reading within 20K of that number will be viewed as dollar bullish as it will confirm that the US economy has rebounded from its winter blues. Chances are good that the data should meet or beat the estimates with the two strongest arguments for a good NFP coming from the continuously improving weekly jobless claims rolls and the big jump to the employment subcomponent of the ISM Services report.

The employment subcomponent of ISM Services tends to be one the better forecast data points for the NFP, although it too has failed more than once to predict the size of the gains. Nevertheless last month it rose more than 6 points to 53.6 from 47.5 - a very sharp gain that bodes well for the headline number.

A strong NFP read should push the USD/JPY towards the 104.50 barrier and the pair may even challenge the key 105.00 barrier in the post news scrum, as markets begin to price in the prospect of further US tightening. A miss however, would put that thesis in doubt and muddy up the picture especially for EUR/USD which could rebound on some short covering flows. This could complicate matters for the ECB as the euro may continue to remain bid if the currency market perceives that both US and EZ monetary policies will remain stationary. Therefore for the euro to truly weaken further the market will need to see either stronger US economic data or some policy action from ECB.