Weak Euro Reaches Yesterday’s Lows; Focus Turns To NFP

USD trades with an upward bias since London open. Euro weakened amid rumors regarding the European bank stress test. UK PPI input prices increase again. Canadian labor market proved strong.

Euro lost all yesterday’s post ECB press conference gains and reached yesterday’s lows at 4228. The fall is blamed on rumors regarding the Bank Stress Test that will be published next week. The document prepared for finance ministers states that banks that fail the test will have till September to repair its balance sheets. If no plan is presented then the government will take steps to ensure the banks financial stability. Moody’s estimates that 26 out of 91 banks could fail the test.

Fear seems to be spreading even to Italy as Italian/German bond spreads reached the highest level since the Euro was introduced. Italian 5 year CDS seen rising too.

June PPI input prices in the UK increased by 0.4% after falling -1.7% a month earlier and reached 17% y/y. Output PPI recorded lowest print since September 2010, +0.1% but increased on yearly basis to 5.7%.

Canadian labor market showed another improvement today when employment increased by 28.4K much higher than expected 13.8K and even higher then previous 22.3K. The unemployment rate has been gradually decreasing since Q3 2009 and stayed steady at 7.4%.

New York session starts at 8:30 am ET with highly anticipated labor market data. Non-Farm Employment Change is expected to reach 87K from previous drop to 54K. Unemployment rate is seen holding steady at 9.1% and Average Hourly Earnings are expected to increase from 1.8% to 1.9% on a yearly basis.

Two weeks ago the Fed acknowledged that growth and labor market indicators have been weaker than anticipated and had to revise its outlook for growth and employment for 2011-2013. Healthy labor market is obviously critical component of a successful recovery. Today, market participants will learn whether the US economy is on the right track to recovery and the current decline is indeed temporary, as Fed believes, or whether the labor market and consequently the economy itself will continue to deteriorate.

Patrik Urban