It was another exciting session in NY early on as the buck extended overnight gains on unbridled risk aversion. The overnight comments from China that they did not ask the G-8 to discuss the USD reserve status at the meeting next week provided the spark and a horrendous NFP report did the rest. US nonfarm payrolls plunged -467K in June, well below the consensus call for a -365K drop but more in line with our forecast of -410K. This sent equities reeling and the yen crosses were promptly sold in size. USD/JPY eventually collapsed from an intraday high by 96.90 towards a 95.70 low. EUR/JPY meanwhile was sitting by the 134.15/20 lows after falling from 136.70 highs earlier in the day.

The immediate reaction in EUR/USD was less decisive as the ECB press conference loomed. President Trichet offered little in the way of nuance and noted that while rates are “appropriate” he does not affirm that they are at the “lowest” level. The EU60 billion covered bond program was not tweaked and thus the reasons to toss EUR around were limited. Eventually it was all about risk and EUR/USD caught up dropping towards 1.3890 where a plethora of stops ostensibly lurk. The other big story was on the commodity front as a near -4% collapse in oil led commodities on a -2% day. This proved detrimental to AUD and CAD on the follow. AUD/USD fell from a NY high near 0.8030 and was sitting at 0.7940 ahead of the close. USD/CAD meanwhile rallied from the 1.1507 session low towards well above the 1.16 level.

Upcoming Economic Data Releases (Asia Session) prior expected

7/2 23:30 GMT AU  AiG Performance of Service Index  JUN  39.9  - -  

On a morning which was overshadowed by the approach of the ECB policy decision and the US June payroll data, it was comments from China that caused much of the price action. The USD climbed after Chinese Vice Foreign Minister He Yafei stated his hope that the USD will remain stable and commented that he was not aware that China had pushed for a discussion of reserve currencies to be on the agenda at this month’s G8 meeting.  Speculation regarding the latter had pushed EUR/USD towards the top end of its range in US hours yesterday, this morning USD/EUR saw a low around 1.4085 before EUR buyers emerged.

The better tone of the USD was noted across the board with the AUD and the GBP being clear losers.  This was in tune with the lack of risk appetite evident in the predominantly poorer tone of stocks during Asian and European hours.  Risk aversion has been prompted by the proximately of the US jobs data and is illustrative of the more cautious tone which has emerging in the market with respect to the outlook for the US and global economies.  The printed market median stands at -365K for US non-farm payrolls in June.  However, following worse than expected ADP employment data yesterday (-473K), the market will be prepared for a poorer set of data.  Weaker data may undermine the USD initially, though the dollar would likely to find support from safe haven flows. 

Today’s decline in cable is reflected in the rise in EUR/GBP.  While yesterday’s UK manufacturing PMI data was indicative of stabilisation in the sector, other data this week have been poor.  Sterling has rallied significantly in recent weeks, without stronger data iit could be liable to give back some more of its gains.

Aside from payrolls number, the market is also turning its attention to the ECB meeting.  No change in policy is expected though some further detail of this month’s EUR60 bln covered bond auction is possible.  The relatively small size of the latter will reduce its potential for any market impact.  Focus of ECB rhetoric is likely to confirm that policy is oriented towards enhancing liquidity provision, particularly given weak lending data and the negative Eurozone CPI and PPI data this week.  While signs of economic stabilisation are likely to be recognised by the ECB, its outlook is set to remain cautious.

EUR/CHF jumped higher this morning following comments from the SNB’s Jordon that he wants to prevent further CHF appreciation and that the SNB remains ready to intervene.  EUR/CHF has not broken above 1.5240 and is liable to give back some of these gains, however, since SNB rhetoric continues to emphasise that it wants to prevent currency appreciation.  There has been no suggestion that the SNB wants to weaken the value of the CHF.  Since 1.50 is still considered to be the SNB’s ‘line in the sand’, the chances of intervention at current levels still seem slim. 

The Riksbank surprised the market this morning by cutting interest rates by 0.25% to 0.25% sending the SEK lower vs the EUR.

Aside from the payrolls data, US May factory orders and initial claims are also due. 

The US Dollar took a few steps out of the hole it was in on Wednesday after China once again doubted the fitness of the Greenback as the sole global reserve currency. And so the verbal tug of war out of China continued, with news that China would want to debate the potential for an alternative global reserve currency at next weeks G8 meeting, and then today the Chinese vice foreign minister denying the claims and exclaiming that the dollar was in fact the premier currency of the global economy as long as it remained “stable”. The constant vacillating out of China pertaining to the Dollar is beginning to pan out like a bad 1970’s sitcom…..

Regardless, the Dollar was slightly stronger in Asia, with EUR/USD dipping from the 1.4150 region to lows right at the 1.4100 figure. The British Pound slipped as well this session, hitting a low near 1.6450 after earlier flirtations with the 1.65000 levels. The low in GBP/USD coincides with the 200 hour Simple Moving Average which currently presides at that same level. The Aussie Dollar took a hit against the Dollar and the Yen after trade data came out much worse than estimates, leading many to surmise that the current low interest rates in Australia are here to stay for a while. AUD/USD dropped from just under 0.8100 and still looked soft as it slid through 0.8040. AUD/JPY skid about 65 pips as well, as it bottomed out at 77.60 as of this writing.

Tomorrow brings important market moving data from both sides of the Atlantic, with the ECB starting things off with its rate decision where most expect the rate to remain unchanged at 1.0%. However, it is the following statement that could help move the Euro as traders look for clues out of ECB President Trichet’s commentary. The more important data, with a higher probability of sending FX markets into frenzy is the Employment data out of the US. The Unemployment rate is projected to come in at 9.6%, up from 9.4% in May, and the economy is projected to have lost 365,000 jobs in June, up from the 345,000 that were lost in the month of May. As can be surmised, any deviation from these projections will have immediate repercussions in the US Dollar.

Upcoming Economic Data Releases (London Session)                 prior      expected

7/2/2009	6:30	SZ	SNB Governing Board Member Thomas Jordan Holds Speech	2-Jul
7/2/2009	8:25	UK	Bank of England's Besley to Make Speech	2-Jul
7/2/2009	8:30	UK	PMI Construction	JUN	45.9	46
7/2/2009	8:30	UK	Bank of England Releases Quarterly Credit Conditions Survey	2-Jul
7/2/2009	8:30	UK	Bank of England's Miles Will Testify to Parliament	2-Jul
7/2/2009	9:00	EC	Euro-Zone Unemployment Rate	MAY	9.20%	9.40%
7/2/2009	9:00	EC	Euro-Zone PPI (YoY)	MAY	-4.60%	-5.60%
7/2/2009	9:00	EC	Euro-Zone PPI (MoM)	MAY	-1.00%	0.10%
7/2/2009	11:45	EC	ECB Announces Interest Rates	2-Jul	1.00%	1.00%