US Dollar, Japanese Yen Up Sharply as Disappointing US NFPs Stoke Flight-to-Safety

 - Euro Down as ECB Leaves Door Open to Further Rate Cuts
 - Swiss Franc Gain vs. Euro Presents SNB Intervention Risks Through Friday
 - British Pound Falls Against US Dollar, Yen as UK Construction PMI Slips     

US Dollar, Japanese Yen Up Sharply as Disappointing US NFPs Stoke Flight-to-Safety

Clear indications from this morning’s US non-farm payrolls (NFP) report that the pace of job losses had accelerated, rather than slowed, was the driver of price action for the markets. Indeed, the news helped to trigger widespread risk aversion that sent US stock indices and classic FX carry trades like AUD/JPY plummeting more than 2 percent and left the Japanese yen and US dollar as the strongest currencies of the day. Looking to the data on hand, NFPs were disappointing as job losses totaled 467,000 during the month of June, compared to expectations for a drop of 365,000, while the May results were revised up to -322,000 from -345,000. Meanwhile, the unemployment rate rose less than expected to 9.5 percent from 9.4 percent and average hourly earnings growth stagnated during the month, bringing the annual rate down to a nearly 4-year low of 2.7 percent from 3.0 percent. All told, the continued deterioration in the labor markets that has led to more job losses and falling wages does not bode well for consumption growth, which composes roughly 70 percent of US GDP, through the rest of the year.

Looking ahead to Friday, US market closures in observance of the July 4 Independence Day holiday could create one of two types of trading conditions due to lower volumes: quiet, range-bound trade or volatile breakouts. There will be no US data on hand, but nevertheless, financial market-related news could be the driver for sharp moves. In light of the uncertainty, I would personally prefer to stay out of the markets and wait to enter any new positions until trading resumes next week.

Euro Down as ECB Leaves Door Open to Further Rate Cuts

The euro ended Thursday down against most of the majors, gaining only against the commodity dollars, after the European Central Bank left rates unchanged at 1.00 percent, as expected, for the second straight month. ECB President Jean-Claude Trichet said that “current rates are appropriate” and that recovery is expected in mid-2010, but at the same time, he said later on in an interview that rates may not be at their “lowest” level, suggesting that the ECB feels that they may have room to reduce rates further later in the year. Trichet touched upon the drop in Euro-zone CPI to -0.1 percent, saying that the decline was “in line with previous expectations and reflects mainly temporary effects.”

Meanwhile, the ECB has said they will start operating their 60 billion euro covered bond buying program next week, and purchases in the primary and secondary markets will take place gradually. The goal is to ultimately push money market rates down, loosen up credit conditions, improve liquidity, and encourage banks to lend to businesses and consumers alike.

Looking ahead to Friday, the final readings of Euro-zone services PMI and composite PMI are forecasted to be confirmed at 44.5 and 44.4, respectively. This may mark the thirteenth straight month that PMI held below 50, indicating a lingering contraction in business activity and suggesting that the Euro-zone economy is not in the clear yet. Likewise, retail sales for the month of May are projected to have fallen by 0.1 percent during May, which should push the annual rate of growth down to -2.7 percent from -2.1 percent. Given the low volumes that are likely to be seen due to market closures in the US, surprising data could trigger very sharp moves in the euro.

Swiss Franc Gain vs. Euro Presents SNB Intervention Risks Through Friday

The Swiss franc gained against the commodity dollars and euro, but fell against the British pound, US dollar, and Japanese yen. That said, with the Swiss National Bank focused on EUR/CHF, I am as well. The SNB has intervened as recently as last week, and SNB directorate member Thomas Jordan said today that they “continue to consider interventions to prevent an excessive rise in the Swiss franc.” At the end of Thursday’s US trading session, EUR/CHF was trading at a bottom of an intraday channel formation, with support at 1.5180, which offers fairly good risk/reward potential to buy the pair. Event risk may work in favor of EUR/CHF bulls as well: on Friday morning, the annual rate of Swiss CPI growth could fall to a record low of -1.1 percent for the month of June from -1.0 percent. The whole reason why the SNB has been intervening is because of their concerns about deflation risks, and evidence that the price phenomenon is indeed taking place could be a trigger for Swiss franc declines.

British Pound Falls Against US Dollar, Yen as UK Construction PMI Slips

The British pound lost out against the ultra-strong US dollar and Japanese yen as risk aversion took its toll. Adding to the mix, UK construction PMI unexpectedly fell to a reading of 44.5 in June from 45.9, signaling that business activity contracted more sharply and indicating that the UK recession remains in full force. Upcoming data on Friday may confirm or negate this theory, as services PMI is projected to slip to 51.5 in June from 51.7. Since 50 is the point of neutrality for the index it will be very important to see if it falls below that level, signaling a contraction in activity, or manages to hold near current levels.