Markets Cautious Ahead Of NFP And France/Greece Elections

After yesterday's brief rally, dollar stuck in tight range against European majors today as markets are awaiting employment report from US. Yesterday's jobless claims data eased some concerns on job growth momentum in US. But sentiments could yet turn again after today's non-farm payroll report. Also traders are cautious ahead of elections in France and Greece over the weekend. Price actions remain indecisive so far. Though, clearer weakness is seen in Aussie, which is weighed down by rate expectations. Deeper selloff was also seen against dollar earlier today as RBA lowered both growth and inflation forecast.

Dollar was somewhat under mild pressure recently, most notably against yen, as the weaker than expected Q1 GDP data revived some speculations of QE3 from Fed. In addition, initial jobless claimed jumped above 380k level in first week of April and stayed above for three consecutive week till the week of April 28. The data also triggered some concern on momentum of the job market recovery. The non-farm payroll data for April will be more important than usual as other recent data turned mixed.

Markets are expecting NFP to show 165k growth in April with unemployment rate unchanged at 8.2%. Leading indicators to NFP were mixed ADP private report at 119k only. Four week moving average of initial claims rose from 363k to 383k. The employment component of ISM non-manufacturing dropped from 56.7 to 54.2. though, the employment component of ISM manufacturing rose from 56.1 to 57.3. So after all, NFP is unlikely to post some strong upside surprise but would likely be decent at around 150k level at least. Though, the major surprise factor would be in whether March's number would be revised up from the dismal 120k.

France and Greece will hold elections this weekend on May 6. In France, Socialist challenger Hollande continues to lead presidential incumber Sarkozy in polls and is favored to win the election. There are two major questions should Hollande wins. Firstly, he's been clear that he will push to re-negotiate the fiscal compact in EU. Secondly, the Franco-German leadership in Eurozone could be changed and Merkel could be isolated in her campaign for austerity. Meanwhile, there are much uncertainties in Greece election. It's not even doubtful whether the dominant New Democracy and Pasok could win majority of 300 seats in Parliament between them. And Greece could have another elections by year end. Meanwhile, a stable government is needed by June to push through the austerity measures as requirement of the bailout package.

After cutting rates more than expected by 50bps earlier this week, RBA released updated forecasts in its monetary policy statement today. Growth is projected to be at 3.0% in 2012, down from February's projection of 3.5%. CPI is projected to be 2.5% by the end of the year, down from prior projection of 3.0%. Core inflation is projected to be at 2.25% by the end of the year, down from prior projection of 2.75%. And, the updated projections are based on assumption that the overnight cash rate remains unchanged at 3.75%. Markets are now pricing in more than 70% chance of another 25bps cut by June.