Key Points
USD upside bias remains in place after recent data improvements and position liquidation risk.
Today's US employment report will need to be very weak to present an offset.
This week's ISMs should also help to bolster next week's FOMC statement.
CAD is the odd one out against the USD.
Riksbank announcement in focus this morning - 25bp rate hike likely.

Market Outlook
The USD remains better supported by the US data developments of this week and unless there is a complete disaster in today's employment report, further USD gains look likely in the short-term as existing short USD positioning is unwound. The 1-mth risk-reversal on EUR-USD (that has been showing a premium of calls over puts) has also fallen back to its lowest level since early March, suggesting fading EUR support from the options market.

Key support in the 1.3460-1.3500 area is likely to be put to the test on EUR-USD during this time (1.3460 being the breakout point for the latest period of strength since early April). Whether this move extends any further will depend upon the nature of next week's releases, especially the FOMC statement and retail sales. Note that this week's ISM outcomes are almost doubly important in this regard, as they should ensure that the FOMC will not be downgrading its thoughts about the economy any further for the time being, even though they may acknowledge a slightly friendlier inflation backdrop. If 1.3460 does break there would be risk down to 1.3340.

If a weak employment report can be avoided today USD advances are likely across the board, with USD-JPY having already eased clear of 120.00 and high-yielders such as the AUD and the NZD also looking vulnerable. The AUD was hurt by a larger than expected trade deficit last night and support is now at 0.8150. 0.8000-50 is major support below this and should hold. NZD has scope to 0.7320 and 0.7260.

A possible exception could be USD-CAD, which is the one USD rate that has not been characterised by excessive short USD positioning in recent times. Indeed, the CAD has been strengthening in recent weeks due to the ongoing elimination of prior short CAD positioning. This adjustment is now complete, which removes one negative factor for USD-CAD, but the implications for the CAD of a potentially stronger US economy are not as negative as for other currencies. An improving US economy could actually boost expectations of a BoC rate hike, as the BoC has identified the US as a key downside risk for the Canadian economy. If the USD does recover substantially, a stronger USD-CAD may still be seen, but the CAD is likely to outperform other currencies. 1.1100 and 1.1145 are resistance points on USD-CAD - support is at 1.1025-50

The Riksbank announcement is due first thing this morning (see below for preview). The immediate parameters of importance on EUR-SEK are at 9.1770-9.1850 on the topside and 9.12 on the downside, with the 'big figures' at 9.10 and 9.20 also carrying some importance. Unchanged rates will prompt a knee-jerk reaction higher and this could see a brief move above the aforementioned levels, although we would expect the SEK to remain well supported by the solid economic activity backdrop and the fact that the government has now begun its privatisation process (good for foreign inflows). A rate hike, the more likely outcome in our view, should see a move below 9.10, although it is not clear whether EUR-SEK is ready to make the big break below major support at 8.95-9.00.

Day Ahead
Sweden - the market is fairly split on the likely outcome of this morning's Riksbank announcement. Expectations have been turned on their head in recent weeks by a number of factors. 1) the revelation in the last set of Riksbank minutes that one member, Oberg, had voted in favour of a rate hike, 2) in its Budget (indicating further tax cuts) the government assumed a level of interest rates in future years that was well above that put forward by the Riksbank in the February Inflation Report and 3) a variety of data (notably consumer confidence and retail sales) have been strong of late. A rate hike could easily be justified in such circumstances (and on balance seems the more likely outcome), but it would also represent an admission on the part of the Riksbank that they (unintentionally) misled the market back in February. However, explaining why they haven't raised rates could be an equally difficult exercise.

Eurozone - PMI services data in the Eurozone are likely to confirm the solid activity backdrop and will need to be unusual to affect the EUR.

US - last month's employment report was stronger than expected, with non-farm payrolls helped by some upward revisions to February. Weekly hours data was also slightly stronger. The 3-mth moving average of the m/m change in payrolls ( 151.7k) remains soft compared to the performance of recent years, but it is still above the 10-yr average of 131k and is not currently weak enough to be a serious threat to consumer spending. As long as such weakness can be avoided (key today), any broader pick-up in economic activity, such as that tentatively signalled by this week's ISM surveys, should help to nurture the idea that the labour market (a lagging indicator of output) will ultimately remain well supported.

Diary
Data/event BST Consensus*
 
SE Riksbank repo announcement 08.30 unch/ 25bp
IT PMI services (Apr) 08.45 54.3
FR PMI services (Apr) 08.50 59.4
DE PMI services (Apr) 08.55 57.9
EU PMI services (Apr) 09.00 57.6
NO Unemployment rate (Feb, sa) 09.00 2.6%
EU Retail sales (Mar) m/m 10.00 0.5%
US Non-farm payrolls (Apr) 13.30 100k
US Unemployment rate (Apr) 13.30 4.5%
US Average workweek (Apr) 13.30 33.8
US Hourly earnings (Apr) m/m 13.30 0.3%
US Fed's Geithner on global economy 14.45
CA PMI (Apr, nsa) 15.00 57.3
US Fed's Hoenig speaks 16.20
Latest data Actual Consensus*
AU Trade balance (Mar) -A$1.6bn -A$1.1bn
* Consensus unless stated