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EM, high-beta appetite restricted pre-US jobs

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The overnight FX trading remained mostly ranged, stocks traded water except Shanghai’s Composite down to 3,052.939 on news that Hong Kong estimates Shanghai’s trading link quota would be filled by the end of the first quarter (Rts). USDCNY gap-opened as PBoC’s Lei said this week’s RRR cut is not the beginning of a strong monetary stimulus. Given the macroeconomic conditions however, traders see further room for additional PBoC cuts to keep liquidity stable as growth concerns persist. Option bids trail above 6.20 before the closing bell.

USD/JPY and JPY crosses were mixed in Tokyo. USDJPY sees resistance at 9-day Ichimoku conversion line (117.66), more offers are seen at 118.30/119.28 (baseline / cloud top). Option bets turn supportive above 119.40. On the downside, bids trail up from 117.00/25.

EUR/USD and EURJPY remain offered below their 21-dma (1.1495 / 135.38 respectively) as traders look to sell EUR-crosses on uncertainties regarding the Greek situation. The EURUSD technicals are positive, yet decent option barriers are placed at 1.15+, if cleared should open the way to 1.1660/79 (Fibonacci 38.2% on December-January sell-off / Jan 21st high). The US jobs data should be determinant in direction before the week close, while EU-Greece tensions is the major downside risk to the short-term bullish push on both pairs.

The US labor data is the key event of the day. The January nonfarm payrolls are expected at 230K (vs. 252K last), the unemployment rate has likely steadied at 5.6% with slight improvement in average earnings. We have seen on latest data that the household spending has hard time picking up. This means that the weakness in the core PCE is partially due to low spending, and not only due to lower oil prices. Strong NFP reading today should keep Fed hawks hoping for the first Fed rate hike to happen by 2H, 2015; the sovereign curve steepens with 10-year yields back above 1.80%.

The high-beta currencies continue recovering. USDCAD retreats below 1.2500 as oil markets recover. AUDUSD tests 0.7850 (post-RBA double top), while NZDUSD prepares to step in short-term consolidation zone for a daily close above 0.7451 (MACD pivot). The USD appetite in the afternoon will be important as the Fed is seen diverging from the expansive monetary policies in Canada, Australia and New Zealand.

Else, USDBRL spiked to 2.7620 (fresh 10-year high) as the Petrobras corruption scandal keeps flows away from Brazil besides the broadly limited EM appetite pre-US jobs. USDZAR tests January-February down-trending base (11.25) with decent option barriers at 11.40 supportive of deeper short-term ZAR correction should the US prints no-surprise data.

Besides the US jobs, traders watch German and Spanish December Industrial Production m/m & y/y, French December Trade & Budget Balance ytd, Swiss January Foreign Currency Reserves, Swiss December Retail Sales y/y, Swedish January Budget Balance and Average House Prices, Norway December Industrial and Manufacturing Production m/m & y/y, UK December Trade Balance, US January Nonfarm Payrolls, Unemployment and Participation rate, Average Earnings m/m & y/y, Canadian January Unemployment and Participation rate and Employment Change and US December Consumer Credit.

Luc Luyet, CIIA – Senior Market Analyst:

“One of the key issues for the Fed concerning the start of its tightening cycle is the weakness in non-US demand. However, given the recent acceleration of retail sales in the euro area and the improving PMIs, it is unlikely to be an obstacle for a June hike. As a result, US labor market data, especially wages growth, are expected to be the critical factor in the Fed’s timing. Positive labor data would strengthen a June hike and likely force the market to reassess its current dovish Fed funds rate expectations.”

“Looking at gold seasonality from 1980, there is a tendency for the precious metals to display weak monthly returns from February to June (April being the exception). A reason for these poor returns is likely coming from a weaker physical demand from China and India. Indeed, Chinese demand tends to decline after the Lunar New Year, while India seasonal demand kicks in during the third quarter. Given the high levels of gold net long positions, we suspect that gold is unlikely to perform well in the next few months.”

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