FOREX: US Dollar May Give Back Some Recent Gains on Soft Jobs Report

The US Dollar may give back some of this week's impressive gains as closely-watched labor market data show April saw the smallest jobs gain in three months.

Overnight Headlines

• Japanese Yen Slumps on Amid FX Intervention Fears
• Aussie Dollar Soars on Hawkish RBA Quarterly Report

Critical Levels

CCY	SUPPORT	RESISTANCE
EURUSD	1.4400	1.4789
GBPUSD	1.6317	1.6501

The Euro and the British Pound were little changed in overnight trade, with markets settling in ahead of the upcoming US Employment report (see below). We are looking for a pullback in EURUSD and GBPUSD to yield selling opportunities in the days ahead.

Asia Session: What Happened

GMT	CCY	EVENT	ACT	EXP	PREV
23:30	AUD	AiG Performance of Construction Index (APR)	37.9	-	39.4
23:50	JPY	Monetary Base (YoY) (APR)	23.9%	-	16.9%
1:30	AUD	RBA Releases Quarterly Economic Forecasts	-	-	-

The Australian Dollar outperformed in overnight trade, rising as much as 1.5 percent on average against its top counterparts, after the Reserve Bank of Australia released a decidedly hawkish Quarterly Economic Forecast report. Policymakers predicted core inflation will stand at 3 percent from the end of this year through mid-2013 and said higher interest rates are “likely to be required”. A Credit Suisse gauge tracking the one-year RBA rate hike outlook jumped 8 basis points to the highest in three months.

The Japanese Yen slumped, down 0.9 percent against the majors, amid intervention fears after the currency strengthened beyond 80 to the US Dollar, a boundary believed to be a line in the sand for policy makers. On balance, such fears appear overstated however, considering the central bank has explicitly said on several previous occasions that their objective was to manage volatility rather than protect a given level for the exchange rate. Indeed, it seems reasonable for Japanese authorities to prefer a stronger Yen over the near term considering the reconstruction effort in the aftermath of the Tohoku quake will require heavy expenditures on imports.

Euro Session: What to Expect

GMT	CCY	EVENT	EXP	PREV	IMPACT
5:45	CHF	Unemployment Rate (APR)	3.3%	3.4%	Medium
5:45	CHF	Unemployment Rate s.a. (APR)	3.2%	3.3%	Medium
6:45	EUR	French Central Government Balance (€) (MAR)	-	-28.0B	Low
6:45	EUR	French Trade Balance (€) (MAR)	-6.50B	-6.55B	Low
8:30	GBP	Producer Price Index Input (MoM) (APR)	1.6%	3.7%	Low
8:30	GBP	Producer Price Index Input (YoY) (APR)	16.3%	14.6%	Low
8:30	GBP	Producer Price Index Output (MoM) (APR)	0.7%	0.9%	Medium
8:30	GBP	Producer Price Index Output (YoY) (APR)	5.1%	5.4%	Medium
8:30	GBP	Producer Price Index Output Core (MoM) (APR)	0.3%	0.4%	Low
8:30	GBP	Producer Price Index Output Core (YoY) (APR)	3.0%	3.0%	Low
10:00	EUR	German Industrial Production (YoY) (MAR)	10.3%	14.8%	Medium
10:00	EUR	German Industrial Production (MoM) (MAR)	0.5%	1.6%	Low

Switzerland's Unemployment Rate is expected to tick lower to 3.3 percent in April, marking the lowest reading in 27 months. The outcome promises to reinforce the recent stream of better-than-expected data out of the mountain nation, bolstering existing upward pressure on interest rate hike expectations along with the Swiss Franc. Indeed, a Citigroup index tracking positive Swiss economic data surprises is holding near a 10-month high. Meanwhile, the SNB said its “ready to take measures necessary to ensure stable prices” and contended that the current, ultra-loose monetary policy “carries long-term risks for prices” last week, giving the strongest indication yet that it was getting ready to unwind stimulus.

UK Producer Price Index figures are set to show that wholesale inflation slowed for the first in seven months in April, dropping to 5.1 percent. Absent a meaningful surprise to the upside, the outcome is unlikely to prove market-moving considering its limited implications for monetary policy expectations after the Bank of England left monetary unchanged for the 25th consecutive month yesterday. In fact, little is likely to change in traders' interest rate expectations until the release of the latest quarterly inflation report (May 11) as well as minutes from yesterday's sit-down (May 18).

Likewise, German Industrial Production figures will likely pass with little fanfare. Expectations call for a slowdown in March, with output adding 10.3 percent from the previous year compared with a 14.8 percent increase in the previous month. Still, the reading falls broadly within the range of values recorded over the past year, pointing to relative stability rather than acute deterioration.

On balance, currencies are likely to stay quiet early in the session as markets await the all-important release of the US Employment report. Expectations call for the world's top economy to add 185,000 jobs in April – marking the smallest increase in three months – while the Unemployment Rate holds steady at 8.8 percent. Traders have been buying the US Dollar this week, with the currency on pace to produce the best five-day run since early January, as markets look ahead to rising US yields after the Federal Reserve firmly pledged to end QE2 in June at last week's FOMC meeting. It seems reasonable that a soft employment figure may be just the catalyst to engineer some profit-taking into the week-end, with the greenback retracing some of its advance against the majors.

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