Payrolls may reduce the tension but it can't fix the budget problems of Spain, Portugal and Greece.

After yesterday's 5.9% drop, the Spanish stock market opened this morning with another sharp decline, but subsequently bounced from the lows. Generally, European bourses while down on the day are not extending their early falls. Similarly, USD/JPY dropped again shortly after the London open after an attempt to push higher in Asia, but buying pressures emerged. EUR/JPY, GBP/JPY and AUD/JPY are all displaying the same pattern and are holding above their recent lows.

Clearly the release of the non-farm payrolls data will be the next big trigger for the markets. A better set of numbers would clear reduce the tensions which have become evident across all markets, but US data cannot fix the budgetary problems of Spain, Portugal and Greece. News of further planned strike action in Greece demonstrates that this week's approval of the budget by the European Commission is only the first in a series of hoops that the Greek government has to jump through in order to reduce its budget to more acceptable levels. Spain this week presented its budget to the European Commission for approval. The Commission's reaction will be closely followed by the markets. While it may rap Spain on the knuckles for allowing its budget to get out of hand and while some amendments may be recommended, the Commission will almost certainly have to approve Spain's plan. Not to endorse the budget plans of Spain, Portugal or Greece would encourage uncertainty in the markets, shift bond yields higher and effectively raise the risk that the structure of EMU as we know it would have to be altered. Once the Commission has approved all these budgets, the markets will have to shift its focus to the degree of success the gov'ts have in implementing austerity measures and also the appetite of investors to keep buying the debt of these nations. It may be months before the risk of a bailout from either the ECB or the IMF can be ruled out. In the meantime the EUR will likely remain vulnerable. EUR/USD today has printed a low of USD1.3651.

Cable took out the Oct low of 1.5710 this morning prompted a fall to the 1.5665 level before buyers stepped in. EUR/GBP has remained within a 0.8690 to 0.8760 range this week forcing cable to take the strain of USD strength. Sterling's 7.5% rally vs the EUR since Oct, concerns about the UK's budget deficit in addition to uncertainties pertaining to the forthcoming general election have sapped the ability of sterling to benefit further from the EUR's decline. That said, a continuation of downside pressure on the EUR is likely to see EUR/GBP testing the bottom of its range and head back down towards 0.8600. UK PPI input data was stronger than expected at 2.0% m/m in reflection of higher energy prices. This may feed inflationary concerns in the UK, though inflation is likely to moderate in a few months time.

EUR/CHF surged in Asian hours bringing speculation of SNB intervention. EUR/CHF has been trended lower since mid-Dec. However, the SNB are likely to continue smoothing the pace of further declines.

USD/CAD has pushed as far as 1.0780 this morning. The market is expected Canadian employment to have risen by 15K in Jan. The market median for US nonfarm payrolls is also at +15K. The G7 are due to meet this weekend. No communiqué is expected. Japanese Finance Minister Kan has stated that it would be fairer to discuss the CNY at the G20 meeting rather than at the G7.
Jane Foley