Strong Risk Rally On ECB, Nonfarm Payroll Next

Risk appetite was given a strong boost overnight by ECB Draghi's bond buying plan as well as solid economic data from US. S&P 500 soared to close at four year high of 1432 and that's followed by broad based rally in Asian equities. The aussie has so far been the biggest winner and enjoyed strong rebound against dollar and euro.

Canadian dollar also followed risk rally but strength was slightly weaker than the aussie as limited crude oil's pull back. While the dollar was pressured, the Japanese yen was even weaker as yen crosses were given additional boost from strong rebound in US Treasury yields. Focus will now turn to nonfarm payroll report from US today for the needed fuel for to extend the risk rally.

ECB leaves main refinancing rate unchanged at 0.75%, compared with our expectation of a rate cut of -25 bps. Policymakers believed that this is not an appropriate time to lower interests as economic weakness had been anticipated. Meanwhile, President Draghi stated at the press conference that officials have basically agreed on unlimited bond purchase program.

Despite objected by a member, the program is expected to be able to help "address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro." According to Draghi, purchases would be fully sterilized, suggesting that the program would not trigger inflation pressure. The ECB also affirmed that purchases would not have seniority.

The stronger-than-expected ADP employment report, which showed 201k expansion in the private sector jobs in August, lifted expectations for today's NFP. Economists expect the nonfarm payroll report to show 127k expansion in August with unemployment rate unchanged at 8.3%. While the employment component of ISM manufacturing dropped from 52.0 to 51.6 in August, the improvement in employment component of ISM services, which jumped from 49.3 to 53.8, was encouraging.

An upside surprise in today's NFP is possible and in that case, the Japanese yen would likely be sold off further. A key implication of the job data is the chance of QE3 from Fed. Bernanke has clearly said that the employment market was a "grave concern" and that would be the major factor in determining the timing of additional stimulus. It's a bit tricky to predict the reactions of the stock markets, and commodity currencies, on the job figure as a good number would reduce the odds of more QE. But for sure, yield would jump in that scenario and should take yen crosses higher.

Meanwhile, a long list of key economic data will also be released today. That include Swiss unemployment, foreign currency reserves, UK industrial and manufacturing production, German trade balance and industrial production in European also. Also, Canada will release employment report which is expected to show 11k growth in August with unemployment rate unchanged at 7.3%. Double boost of US and Canadian job data would possibly send USD/CAD through the important 0.9799 support. Canada will also release building permits and Ivey PMI.