Talking Points

• US Dollar Consolidates in Asia as Traders Await Employment Report
• Eurozone Debt Crisis to Retake Spotlight After US Jobs Data Passes
• EZ PPI to Hit 11-Month Low, Boosting Case for ECB Bond Purchases

The major currencies were little changed against theUS Dollar in overnight trade as investors braced for the closely-watchedUS Employmentreport on tap ahead. Expectations call for the world’s top economy to add 125,000 jobs in November, an improvement from the 80,000 increase recorded in the previous month. While the announcement’s historical significance has assured that traders are unwilling to show directional commitment until the data crosses the wires, its actual impact this time around may prove limited.

On balance, the trend in monthly US jobs growth has been steady since the third quarter of last year after labor markets stabilized in the aftermath of the rollercoaster that was the 2008 Great Recession and the breakneck 2009 stimulus-driven rebound. Since then, the economy has added 127,500 jobs per month on average. This means that an outcome in line or close to expectations this time around doesn’t amount to anything materially new on the economic growth landscape, reinforcing the state of affairs that has already been priced into exchange rates.

With this in mind, it seems reasonable to suspect that once event risk passes, investors will turn their attention back to the most pressing issue at hand – the still-unresolvedEurozone debt crisis. Wediscussed yesterday that the subtext of the multilateral reduction in swap rates by the leading central banks was not nearly the positive development thatsubsequent price action suggested. Indeed, the move suggested the world’s monetary authorities were building a bulwark against a credit crunch that would likely break out in event that a large Eurozone member state defaulted. Their decision to do so implies a lack of confidence in the ability of the currency bloc’s policymakers to definitively prevent such an outcome, and if they see the possibility that Europe fails as credible then investors ought to as well.

Practically speaking, this means there is room for some of Wednesday’s moves to be unwound into the week-end, pointing to a recovery in the safe-havenUS Dollar against itssentiment-linked counterparts. In fact,technical positioning seems to be cautiously pointing to just such an outcome. On the economic data front,Euro Zone Producer Price Index figures are on tap, with consensus forecasts suggesting that wholesale inflation slowed to 5.6 percent in October, the weakest in 11 months. As with everything coming out of the single currency area these days, the outcome will be sized up vis-à-vis the debt crisis.

We haveargued previously that the most expeditious way to contain immediate sovereign stress in the Euro area and buy time to implement necessary fiscal reforms is with aggressive ECB purchases of high-debt countries’ bonds. We’ve also suggested that the way to get around German resistance to such a policy is by billing the program as consistent with the bank’s mandate of price stability in the face of a deflationary threat amid aggressively slowing economic growth.French President Nicolas Sarkozy seems to have caught on, saying he was “convinced that faced with the risk of deflation…the [central bank] will act.” A soft PPI reading would naturally help build such an argument, and so may (counter-intuitively) prove supportive for theEuro.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

---Written byIlya Spivak, Currency Strategist forDailyfx.com

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