EUR back in vogue as we wait for NFP

EUR back in vogue as we wait for NFP

It’s been a busy week for the markets, volatility has jumped to its highest level in a month, and European stock markets are set for their biggest weekly decline since  17th April. German bund yields have been stealing the limelight, and are set to close up 85%; they are at their highest level since October after an astonishing rally since the start of May.

German yield watch:

After backing away from the all-important 1% level on Thursday, 10-year German yields are back moving higher and are currently testing the 90 bp level. As we have already mentioned, the big test for German yields will be if they can remain at these elevated highs if there is a strong NFP report later this afternoon.

For now, the market remains more interested in German yields than the prospect of a strong NFP report, FYI we are looking for a reading of 219k, based on US employment leading indicators.

We also mentioned earlier this week that German yields and the EUR had a positive correlation of more than 90% so far this month, hence the dip in EUR/USD on Thursday evening as German bund yields retreated from their highs.

This morning, German bund yields are back moving higher and the EUR is following suit. EUR/USD is in recovery mode today, but is getting stuck around 1.1280 at the time of writing. Whether or not we get above this week’s high at 1.1380 could depend on the market’s reaction to payrolls.

Payrolls: worth getting excited over?

As always with payrolls, ignore them at your peril. After strong German factory orders were released earlier, the data calendar is light until this afternoon’s US labour market report. This dollar seems happy to drift lower into the report, but beware a reversal. The market is prepped for a 220k-ish reading, anything larger than this could cause a knee-jerk recovery in the buck.

As we have pointed out, the market’s main focus is Europe and German bund yields. The euro seems to be taking the news that Greece will bundle its repayments to the IMF rather than make its first June payment today, in its stride. So, can the EUR/ bund movement withstand a strong payrolls figure?

We think that unless we get a figure that knocks expectations out of the ball park (say 250k or more), a short knee-jerk reaction lower in EUR/USD could provide some useful buying opportunities. Key resistance lies at 1.1467, if we get a breakout above this level then it would signal another leg higher for the single currency.

Overall, although payrolls are important, the market is unlikely to focus on the US until the  17th June FOMC meeting, until then the EUR could steal a rally and German bund yields may continue to recover some of 2014’s losses.

Ones to watch:

EUR/USD: levels to note: 1.1380 (Thurs high), 1.1467 (high from 15^th April).

USD/JPY: always one to watch on NFP Friday. A clear break above 125.05 – the recent high, could set the ball in motion for another leg of the uptrend back towards 135.00 – the 2002 high.