Major Currencies vs. US Dollar (% change)
26 Jul 2010 – 30 Jul 2010
General Comment:
The coming week promises to be a busy one for risk sentiment with the spotlight on US economic data and the earnings calendar as traders continue to look to the world’s largest consumer market as the bellwether for the global recovery at large, particularly as other top engines of growth begin to falter. Indeed, Europe is sidelined as it deals with its debt burden, Japan remains in deflation, and China is willfully pulls on the brakes amid fears of overheating.
Just over one-fifth of S&P 500 is set to report second quarter earnings this week; of the 311 companies that have come before, overall outcomes have surprised to the upside by about 10.1 percent and traders will be looking to see if this momentum continues going forward. On the data front, all eyes are pointed toward Friday’s US Employment report. Expectations call for another negative reading – this time to the tune of 60,000 – on the headline Nonfarm Payrolls figure. Traders are likely to look past this outcome however, chalking it up to census-related volatility to focus on the Private Payrolls statistic. Here, expectations call for an increase of 90,000 jobs, marking the third consecutive improvement. All told this seems promising, with employment in the world’s largest consumer market apparently moving in the right direction, albeit at a snail’s pace. Still, it appears there may be scope for cautious optimism, an outcome that could see stocks advance and pull related currencies along for the ride.
EURUSD:
The Euro looks to be re-coupling with risk sentiment. Indeed, the correlation between prices and the MSCI World Stock Index is tracking at the highest in a month, hinting the single currency may extend its advance as stocks remain supported.
The European Central Bank interest rate decision headlines the domestic economic calendar, but this may prove to be a non-event. Indeed, inflation remains below the central bank’s 2 percent target level and monetary conditions have actually turned more restrictive in recent weeks, meaning Jean-Claude Trichet and company are surely in no hurry to act. Indeed, July’s expiry of the ECB’s 12-month repo – a lending facility allowing European banks to secure access to the central bank’s funds for a year – which amounted to large liquidity drain and put upward pressure on short-term borrowing costs. Indeed, European 2-year yields overtook those of the US for the first time in three months at the beginning of this July and finished last week trading at a 23bps premium, meaning Euro Zone monetary conditions are at their most restrictive since mid-February.With borrowing costs set to push higher still as governments issue debt to finance their gaping deficits and economic growth likely to slow amid a lurch toward austerity, the path of least resistance for the ECB points toward (at least) a static posture, with the possibility of renewed easing seemingly far greater than that of tightening.
Source: Bloomberg
GBPUSD:
Relative near-term monetary policy considerations remain in focus, with prices tracking closely with the spread between UK and US three-month Libor rates. Naturally, this puts the onus on the upcoming Bank of England interest rate decision. The outcome will be based on an updated quarterly inflation report, this time taking into account the government’s ambitious austerity budget that aims to trim the public deficit by a hefty 6.3 percent of GDP by 2014-15. To that effect, traders will be keen to size up the central bank’s take on the plan’s implications for economic growth and monetary policy going forward.
The path of least resistance seems to point toward a static posture for the time being. While the BOE itself has argued that elevated stubbornly high CPI inflation is a temporary development, there seems to be no immediate reason to be offering additional stimulus. That said, tightening is surely out of the question as austerity looms ahead. This points toward no changes in the key elements of monetary policy (interest rates, asset purchases), pointing the spotlight on policymakers’ verbiage for clues on their thought process about where things go from here.
Source: Bloomberg
USDJPY:
Prices continue tracking the yield on the US Treasuries. This puts the spotlight on US earnings and economic data – most notably the jobs report – indirectly aligning the pair with risk appetite as overall confidence and the rates outlook seemingly hinge on the same set of near-term developments.
Source: Bloomberg
USDCAD, AUDUSD, NZDUSD:
The commodity bloc remains closely tied to risk sentiment, with the correlations between prices and the MSCI World Stock Index still holding strong (AUD: 0.80, NZD: 0.84 and CAD: 0.77) on 20-day percent-change studies. As with the Euro and the Yen, this keeps the focus on the US earnings and economic calendars. With the RBA rate decision already in the rearview mirror, New Zealand Unemployment, Australian Trade Balance and Home Loans, as well as Canadian Unemployment figures headline home-grown even risk.
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
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