In Italy, tremors anew
As Silvio’s problems just grew
His tax fraud is real
He’s got no appeal
We may soon bid Letta adieu

What then? Will the euro decline?
Or will traders say its just fine?
Depends if we see
A hiring spree
From Payrolls this morning ere nine

As we await this morning’s NFP data and the accompanying Unemployment Rate, markets are continuing their recent trends. Equities have been rallying strongly based on the continuation of the free money QE paradigm which was reinforced yesterday by both the BOE, which said nothing to change last month’s actions, and the ECB, where Signor Draghi claimed any rate rises were “unwarranted” as the ECB will be keeping rates low for an “extended period”. Treasuries are softer after more good US data has traders getting excited that the Fed’s tapering operation will begin in September, and the dollar is generally stronger on a combination of higher US yields and optimism that the US growth path is sustainably improving. Will all this continue? While I like the dollar higher and bonds lower, I remain concerned over the valuation in the equity markets.

A quick rundown of markets shows the following:

EUR – it has been rallying steadily for 3 weeks but appears to have lost its momentum. While data in the Eurozone has improved, it still lags that of both the US and UK. With Draghi promising no rate movements for an extended period and the market looking for the Fed to ‘taper’ QE, it feels like the euro is rolling over. We never made it to 1.34 on this move and it feels like a test of 1.30 is more likely soon.

JPY – The Fed meeting was the catalyst for the rebound from the 97.75 level and here we are pushing 100 as I type. The Nikkei rallied on the back of the weak yen and the yen remains weak on prospects for further US rate rises. The interest rate spread between JGB’s and Treasuries has widened again and that draws in Japanese buyers of dollars. A strong number this morning should see a break back above 100 and perhaps a test of the early July levels of 101.50.

GBP – The pound has been a bit more volatile than the euro, showing real strength since early July although giving some of it up in the past week. The economic data there has been improving (last night Nationwide House prices roles 0.8%, better than expected and Construction PMI jumped to 57.0, its highest since March, 2012) and Carney continues to have the market’s confidence that he will manage things for growth. I think the pound will outperform the euro but lag the dollar for now, assuming payrolls today confirms the recent USD trend.

BRL – Well, yesterday we traded through 2.30 for the first time since March, 2009, and while the central bank was actively in the market trying to prevent further weakness, the much weaker than expected Trade data (-$1.9 Billion, exp +$400Million), has caused concern amongst investors and added pressure on the currency. My crystal ball still sees 2.50 as a target, although I imagine the central bank will fight it all the way. (I wonder if FinMin Mantega is still worried about a currency war?)

INR – As I pointed out earlier this week, the Rupee has lost the confidence of the FX market. We are currently trading barely below the historic highs in USDINR and seem poised to break well beyond. Strong data this morning will simply add to the pressure on the Rupee and 65.00 is very much in play in the near term. The country cannot seem to address either its weakening growth or rising inflation issues, neither of which is going to support the currency.

Wednesday morning I suggested that the only certainty was that FX rates would move a lot through the end of the week. Even before the payroll report, let’s recap the movements thus far:

As you can see, we’ve already had good movement with more in store today.

Good luck and good weekend
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