Yen, Euro to Outperform vs. Dollar on Soft US Jobs Report

The economic calendar is relatively quiet in European trading hours. April’s UK Services PMI is expected to print unchanged from the prior month. Meanwhile, a slowdown in wholesale inflation penciled in for the March Eurozone PPI report and the weekly LTRO repayment announcement seem moot in the immediate aftermath of yesterday’s ECB rate decision. This shifts the spotlight to the US Employment report capping the week’s top tier scheduled event risk.

Expectations call for the US economy to add 140,000 jobs in April, marking an improvement from the paltry 88,000 increase recorded in March but still falling short of the 12-month trend average at 159,000. Traders will interpret the outcome through the prism of the Fed’s policy statement released earlier this week, where Ben Bernanke left the door open to either taper or expand asset purchases as needed.

With that in mind, a better-than-expected outcome is likely to be supportive for the US Dollar, particularly against the Japanese Yen where it still has a clear yield advantage. The sentiment-geared Australian, Canadian and New Zealand Dollars may likewise thrive as risk appetite swells again. Indeed, the surface-level narrative would sound quite encouraging: the ECB has finally jumped onto the stimulus train and the much-feared “Spring Swoon” in the US is abating.

A look at the details quickly tarnishes such a rosy view however. The ECB rate cut merely brought the benchmark rate closer to actual overnight borrowing costs, which have averaged around 0.1 percent for nearly a year. That makes for a change in policy that is more cosmetic than anything else. Meanwhile, a recent firming in US news-flow over the past week has mostly come from March releases. April’s activity surveys have printed uniformly weaker however, warning that optimism in a swift bounce-back for the world’s largest economy may be misplaced.

A disappointing payrolls number would go a long way to forcing investors to take a more sober look at the global growth landscape, sparking risk aversion and pushing the Yen higher against the spectrum of its G10 counterparts as carry trades unwind. The US Dollar would likely weaken in such a scenario as the possibility of an expanded Fed QE effort enters the conversation. In fact, the Euro may far particularly well against the greenback as the ECB’s paltry easing efforts are sized against the far more robust efforts of its counterpart across the Atlantic. As such, we remain long EURUSD.