Dollars Ease Into NFPs

Trading is predictably range bound ahead of US NFP's due 12:30 GMT later today with EUR/USD trading slightly below 1.2700 while USD/JPY has risen once again above the 118.00 figure. Yen's weakness is due in part to lackluster readings from the index of Coincident indicators which printed at 77.8% below the forecast of 88.9% while the LEI component registered a gain of 20% against 10% expected.

The currency was also weighed down by remarks from new economics Minister Ito who stated that yen weakness is supporting the Japanese economy. Mr. Ito's words were taken by the market as a signal that Japanese authorities are unconcerned about yen' recent decline against both the euro and the dollar and are therefore unlikely to actively intervene in the market to manage its movements.

Finally, the geo-political risks of North Korea's nuclear test scheduled for this week-end also sparked speculative flows out of the yen as traders preferred to stand aside until North Korea completes its exercise. We continue to believe that once the latest dramatics from North Korea are over, the markets will refocus on relative valuations.

To that end, we do not believe that European officials will be nearly as nonchalant about yen's decline against the euro as their Japanese counterparts. If the EUR/JPY once again lodges above the 150 level, the Europeans are likely to escalate their rhetoric significantly. With global currency exchange imbalances now wildly favoring Japanese businesses the other G-3 players will not tolerate the situation for long and therefore USD/JPY risk lies to the topside rather than the downside.

Meanwhile, the marquee event of the day is US NFP's. However, the key to the report may not lie with the jobs number, but rather with average hourly earnings reading. With unemployment rate at a modest 4.7%, wage growth becomes far more critical to future health of the US economy especially in light of the fact that housing which has been a major contributor to US consumer spending in the form of Mortgage Equity Extraction is no longer an easy source of funds.

Thus, assuming that the NFP print within a few thousand jobs of the 100K barrier, the direction in the EUR/USD for the rest of the day may well be driven by the subcomponents of the report rather than the headline number.