EUR/USD has drifted higher through the European morning helped along by comments from ECB Governing Council Member Nowotny suggesting that markets had over-interpreted yesterday’s discussion around the possibility of a negative deposit rate. Mr. Draghi’s comments yesterday triggered a 1%+ drop in the EUR. But Mr. Nowotny has since stated that policymakers have “no plan in this direction.” EUR/USD has recovered a big figure from yesterday’s lows and is currently trading around 1.3150 ahead of the US labour market report. We anticipate the USD to react in line with the strength of the US data in a little while. The consensus expects a rebound in April payrolls (140,000) following the weak increase in March. However, given the weaker run of US data recently (particularly retail sales and inflation), a below consensus increase in payrolls would raise the risk the FOMC increases asset purchases at its next meeting, lowering ten-year US Treasury yields to fresh five-year lows, and weighing on the USD. EUR/USD could have a run back at the 1.32 level were the number to disappoint.
In the UK this morning, the services PMI edged up to 52.9 from 52.4. UK economic data is turning a little for the better. GBP/USD has also pushed a little higher reaching 1.5550 this morning. Direction in the remainder of the day will also be dominated by the US labour market report outturn.
AUD/USD has bounced off apparent support at 1.0220, helped by a rebound in commodity prices; AUD strengthened against the crosses (except against NZD). We retain yesterday’s recommendation of accumulating both AUD and NZD on these dips. It appeared to be model-related selling of AUD and NZD yesterday, which is unlikely to last. The message from the Fed earlier in the week that it is prepared to increase asset purchases should the need arise. Low US ten-year bond yields (1.62%, the lowest levels since December 2012), and the risk of another soft US non-farm payrolls weighing on the USD, should provide AUD and NZD with solid support to end the week.
USD/JPY remained bid, driven by the USD side of the equation. We retain yesterday’s guidance that USD/JPY can reach 100.00 in coming weeks. We retain our view that we have held since late 2012 that USD/JPY will lift because of the collapse in Japan’s current account surplus (to 0.0% of GDP in the three months to February), rather than the recent change in BoJ policy (which we judge will be unsuccessful in its ability to defeat deflation). Japan is experiencing the Golden Week holiday period this week, so liquidity is likely to be thin again in the Asian session today.