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Currency markets are likely to look past a relatively uneventful European economic calendar to fall in with trends in risk sentiment ahead of the US Nonfarm Payrolls report due late into the session, with the US Dollar and Japanese Yen likely to extend gains on safety demand as stocks retreat.

Key Overnight Developments

• Japan's Jobless Rate Unexpectedly Falls, Household Spending Surges
• Australian Inflation Slowest in Six Years, Says TD Securities


Critical Levels

The Euro tested as low as 1.4503 against the US Dollar in early overnight trading but subsequently corrected higher to yield an effectively unchanged result ahead of the opening bell in Europe. The British Pound declined, losing as much as 0.5% against the greenback. We remain short GBPUSD at 1.6617 and EURUSD at 1.4710.

Asia Session Highlights

Japan's Jobless Rate unexpectedly fell to 5.5% in August from 5.7% recorded in the previous month. Economists were forecasting an increase to 5.8% ahead of the release. The ratio of available jobs to seeking applicants held at a record low of 0.42, the first time it did not deteriorate since January 2008. Still, the labor market faces considerable headwinds in the months ahead. The Bank of Japan's Tankan Survey of business confidence revealed that large companies were planning to cut capital investment at the fastest pace in nearly a decade in the third quarter, pointing to firms' expectations of lackluster demand and the likelihood of sluggish hiring. Household Spending surged 2.6% in the year to August, the most in 19 months, on the back of incentive programs to buy electronic products included in the government's hefty 25 trillion yen stimulus package. The sustainability of such performance is questionable as well; indeed, the Bank of Japan has said that domestic consumption will remain weak notwithstanding isolated policy-induced spikes in purchases of specific items.

In Australia, TD Securities' Inflation estimate hinted that prices grew at an annual pace of 1.3% in September, the lowest since records began over six years ago. This puts inflation clearly below the central bank's target rate and suggests that Reserve Bank of Australia Governor Glenn Stevens and company will keep benchmark interest rates on hold when they announce monetary policy next week. Stevens, who gave testimony to the Senate Committee earlier this week, said that while borrowing costs are unusually low and will need to go back to normal levels, inflation targeting will guide the timing of adjustment to more normal levels.


Euro Session: What to Expect

The economic calendar is relatively uneventful in European hours. In the UK, Nationwide House Prices are set to add 0.7% in September, gaining for the fifth consecutive month. The annual pace of decline in property values is expected to decline to -0.3%, the slowest in 18 months. However, analogous reports from Rightmove Plc and the Royal Institution of Chartered Surveyors (RICS) have suggested that much of the rise is accounted for by low supply rather than robust demand for real estate. Turning to the Euro Zone, the rate of contraction in Producer Prices is set to moderate for the first time since July 2008 to register at -7.8% in the year to August after hitting a record low of -8.5% in the previous month, likely reflecting the rebound in the price of oil and other manufacturing inputs.

On balance, currency markets will probably look past the European data docket, turning to trends in risk sentiment to guide price action. Stocks sold off sharply on Wall St and in Asian trading on disappointing US manufacturing and jobless claims data, boosting the safety-linked US Dollar and Japanese Yen against the spectrum of major currencies. More of the same is likely ahead of the US Nonfarm Payrolls report due late into the session, with traders looking to the health of the world's largest consumer market as proxy for the durability of the global economic recovery and the primary gauge of broad market confidence.


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