Euro Slumps But Broad Sentiment Holds Up, Aussie Jobs Preview

The euro fell but other markets reacted surprisingly well to a round of negative news including credit downgrades, the Chinese rate hike and a disappointing ISM non-manufacturing report. EUR and GBP lagged while CHF and JPY led the market. The next 48 hours will be the busiest of the month in terms of data and it begins with New Zealand GDP and Australian employment.

The euro fell slightly more than one cent on Wednesday, primarily due to continuing fallout from the Portuguese downgrade. Speculation about an Irish downgrade and talk of European bank ratings cuts also weighed. Portuguese and Irish 10-year bond spreads hit records with governments there paying around 10% more to borrow than Germans.

The ISM non-manufacturing fell to 53.3 compared to the 54.6 prior and 53.7 expected. The details were somewhat soft as new orders fell to 53.6 from 56.8.

The US focus now shifts to Fridays non-farm payrolls. The ISM employment index ticked to 54.1 from 54.0 and that fits in nicely with the 100K consensus. Negative signs came Wednesday from Challenger, who said planned layoffs increased 11.6% from May to June. Separately, the NFIB employment barometer fell to -7% from -3% -- their chief economist called it a serious reversal and that it quashes any hopes of a positive trend in job creation.

Aside from the fall in the euro markets were relatively stable. The S&P 500 closed near the days highs, up 0.1% to 1339. This is a sign that either: a) the positive underlying sentiment in markets is strong enough to overcome bad news, or b) the market is locked in tight ahead of upcoming data and the ECB and BOE decisions. The answer is unclear to us but given the run-up in risk trades, the more rewarding trade is to position for negative sentiment.

Asia-Pacific Preview

NZD vied for the top place in the G10 complex with CHF and JPY, perhaps anticipating a strong Q2 GDP report at 2245 GMT (Exp +0.3% q/q). Reports of an earthquake sent a 30 pip shudder through NZD but it quickly recovered on reports of minimal damage.

At 0130 GMT Australia releases June employment. Expectations are for a +15.3K reading and a steady 4.9% unemployment rate. The past two reports have been weak after several months (years, in fact) of upside surprises. We dont sense a bias in the market here but note that the 38.2% retracement of the recent rally rests at 1.0637 so we may drift toward that target (spot at 1.0696).

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