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Currency markets are likely to look past the releases of Swiss unemployment, German industrial production and trade figures, and UK PPI to focus on the upcoming US Non Farm Payrolls report due late into European hours. Australian news was mixed in the overnight session as the RBA talked up rate hike possibilities while the construction sector shrank the most since April.

Key Overnight Developments

• Australia's Construction Sector Shrinks Most Since April
• RBA Hints at Rate Hikes But Traders Not Convinced
• Euro, Pound Little Changed in Overnight Trading

Critical Levels


The Euro failed to retain momentum on an attempted rebound in Asian trading after the selloff in New York hours, testing as high as 1.4373 but reversing course mid-way through the session to trade little changed ahead of the opening bell in Europe. The British Pound traded sideways in a narrow 60-pip range above US-session lows near 1.6750.

Asia Session Highlights

Australia's AiG Performance of Construction Index fell for the second consecutive month to register at 39.5 in July, showing the building industry contracted at the fastest pace since April. The metric was led lower by drops in sector-wide employment, apartment construction, and engineering demand. The government introduced A$34 billion in fiscal stimulus this year, distributing A$12 billion as cash handouts to households and setting aside A$22 billion for infrastructure projects. We noted signs that the consumer-focused portion of the plan was losing steam earlier this week, and today's report may be the first clue to confirming that the building component is heading in the same direction. Indeed, it is hard to imagine that any infrastructure project can meaningfully get off the ground without engineers to design it and new builders to execute it.

Related Article: Reserve Bank of Australia Hints at Rate Hikes, Traders Not Convinced

Euro Session: What to Expect

Switzerland's seasonally adjusted Unemployment Rate is set to rise to 3.9% in July, the highest in close to five years, pointing to mounting headwinds for consumer spending and thereby overall economic growth. In fact, the jobless rate may actually be understating the total impact of the current downturn on consumers' spending power as many firms looked to cut costs by switching a portion of the workforce to a short-time schedule, which amounts to fewer hours and thereby smaller paychecks. Naturally, this trims disposable incomes and adds to already formidable disincentives to consume. Although exports are heavily represented as a component of Swiss economic growth, domestic demand is still by far the most important driver of activity, contributing about 60% to total output. The State Secretariat for Economic Affairs (SECO) has forecast that the jobless rate will register at 3.8% through 2009, an expectation that has been echoed in a survey of economists conducted by Bloomberg. Job losses have grown at an average pace of 3.35% in the six months through June and so would be expected to rise by an average of 4.25% in the second half of the year.

Germany's Current Account surplus is expected to print at 8 billion euro in June from 3.7 billion in the previous month as exports grow 0.9%, outpacing a 0.7% increase in imports. Although this would mark a bit of an improvement on a monthly basis, the outcome still falls firmly within the downward trajectory that has been in place since the surplus peaked in the third quarter of 2007. Indeed, economists polled by Bloomberg predict that net exports will contribute an average of 3.72% to overall economic growth this year and in 2010, the smallest in 6 years. While Germany's current account has been eroding for the better part of the past two years, its US counterpart has been narrowing. Indeed, the US external deficit peaked in the three months to September 2006 and has narrowed by a whopping $113.3 billion to date. Germany has a deep trade relationship with the US, so a continuation of this trajectory implies long-term downward pressure on EURUSD as capital outflows overwhelm inflows into the Euro Zone's largest economy and top exporter.

Separately, the annual pace of decline in German Industrial Production is expected to moderate for the third consecutive month, with output shrinking -17.5%. As with similar improvements noted in recent months across developed countries, the reading is unlikely to prove particularly market-moving considering traders have likely already priced in the stabilizing effects of the ample global fiscal boost and inventory restocking into the exchange rate. Indeed, the question to be answered from here is what will happen after the flow of government cash dries up and the inventory cycle runs its course.

Finally, the UK Producer Price Index report is expected to show that wholesale inflation shrank at an annual pace of -1.7% in June, the largest drop on since records began in 1979. The metric points to continued downward pressure on consumer prices, the headline inflation gauge, as lower wholesale costs filter into the final price tag. Indeed, the Bank of England said that while some recovery in output growth is in prospect, aggregate supply is likely to continue to outstrip demand for some while yet, bearing down on inflation in the medium term. CPI fell below the 2% target level for the first time in 2 years in June and is expected to average at 1.15% for the remainder of the year.

On balance, the European data docket is likely to prove secondary as currency markets focus their attention on the upcoming Non Farm Payrolls report out of United States to be released late into the session.

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