Non Farm Payrolls Friday welcomes back risk-off mode!

It’s payroll Friday. The weakness due to a session of unique corporate events from July has reversed, setting the stage for a solid non-farm payroll employment increase of 220k in August. ADP reported a 163k rise in private employment, slightly below the 200k expected. Broad employment indicators during August remained firm, with minor slowing in service-sector employment growth. The market expected a strong non-farm payroll employment increase of 191k in August. The marginal seasional effect could prove a drag on average hourly earnings but this is still likely to print an increase of 0.18% m/m or 2.69% annually. Finally, in the light of sustained employment growth markets expect the unemployment rate to fall to 3.8% with a potential risk of 3.7% read. Yet a spillover into USD should be limited given the broader macro environments. Trump is doing his best to derail optimism over the US. Apparently attempting to open a new front in the global trade war, Trump reportedly told The Wall Street Journal that he was “still bothered by the terms of U.S trade with Japan.” This comes on top of escalated tensions between the US and China as Trump threatens new tariffs on the Asian powerhouse. China was quick to warn of retaliatory actions should Trump move forward. USDJPY, the regional risk barometer, fell to 110.62 suggesting risk-off sentiments. Interestingly, the resilient US equity markets have had a difficult week as the tech sector saw sustained selling. While the direction for USD remains complex, we are more confident that selling pressure on high beta EM currencies such as TRY, RUBV and ZAR will remain high.

German economy likely to grow moderately in 2H2018 as foreign demand expected to decline

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The German economy did well in the month of August. It managed to overcome the weakness from the first half amid improved manufacturing and service activity while inflation remained below the 2% threshold thanks to more stable currency exchanges across the months of July and August. But the trend is likely to change in the coming months as foreign demand is expected to decline rapidly.

Indeed, with German industry remaining strongly dependent on its automotive sector – accounting for more than 20% of total German industry revenue – and manufacturing orders remaining in negative territories for the second consecutive term (despite stronger domestic orders) owing to looming US tariffs on the EU automotive industry, the German economy is likely to grow only moderately in the second half of 2018.

Additionally, recent current account balance data tends toward a weaker trade surplus for the country, pushing manufacturing confidence downward starting from September.

The recent EUR/USD bounce is not expected to be sustained. The pair will be heading downward, approaching the 1.1570 range as the market is waiting for the US announcement of further duties against China.

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