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Light Docket Puts Focus on Developing Theme - Higher US Yields and USD

Light Docket Puts Focus on Developing Theme - Higher US Yields and USD

Christopher Vecchio, CFA, Kevin Jin,

The Federal Reserve held QE3 in place at $85B/month but that has done little to stop the US Dollar’s revival. On the back of an improved labor market outlook, the world’s reserve currency has coat-tailed US Treasury yields higher, climbing back to its highest aggregate level (as measured by the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR)) since June 3. The 10-year US Treasury note yield topped 2.500% on Friday for the first time in 22-months, if to underscore the dramatic shift transpiring.

In the week ahead, this developing theme – alongside the Chinese credit crunch – are likely to guide markets in the days ahead as the calendar is significantly lighter. There are several ‘high’ significance events on the calendar, but nothing close to the magnitude of last Wednesday’s Fed policy meeting. Overall, volatility is expected to remain high, and with upwards of seven Fed speeches over the coming days, the US Dollar’s trajectory, while upward, could see some added turbulence.

Rate Hike Probabilities / Basis-Points Expectations

Light_Docket_Puts_Focus_on_Developing_Theme_-_Higher_US_Yields_and_USD_body_Picture_4.png, Light Docket Puts Focus on Developing Theme - Higher US Yields and USD

See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.

06/25Tuesday // 12:30 GMT: USD Durable Goods Orders (MAY)

US monetary policy is dominating headlines and the market’s main concern is when the Fed will begin tapering QE. Fed Chairman Bernanke stated that the decision to begin tapering will be based off of economic data. Durable goods numbers are indeed important because consumers usually buy durable goods when income conditions are better—otherwise consumers may choose to wait until the economy improves before buying a refrigerator, for example. Durable goods orders are expected to increase +3.0% m/m (down from +3.5% in April), according to a Bloomberg News survey. The US consumer has in fact shown resilience so far this year while other sectors such as manufacturing as slowing. Tuesday will show if this trend continues.

CONSENSUS: +3.0% m/m

PRIOR: +3.3% m/m

The key pairs to watch are EURUSD and USDCAD.

06/25Tuesday // 14:00 GMT: USD Consumer Confidence (JUN)

US consumer confidence has been the stabilizing force keeping consumption trends boosted, as the payroll tax hike and fiscal budget sequestration have presented sizeable obstacles. Confidence surveys serve as leading indicators for the broader economy, and often have a noteworthy correlation with equity markets. Likewise, the brief setback in US equities should only lead to a brief setback in the Conference Board’s Consumer Confidence index, and the headline should remain near its highest level since February 2008.


PRIOR: 76.2

The key pairs to watch are EURUSD and USDJPY.

06/27 Thursday // 07:55 GMT: EUR German Unemployment Change and Rate (JUN)

Germany’s employment situation has been worrisome in recent months. Data shows higher unemployment claims than Bloomberg News survey expected each of the last four months. Although the labor market in Germany is not nearly as precarious as it is in the peripheral nations of Italy and Spain, hints at German weakness will add to recent downward pressure on the Euro. Generally speaking, many Euro-zone citizens move to Germany to find work to skirt overprotective labor laws in their native countries. As a result, the German labor market can be extrapolated to reflect overall European health.


PRIOR: 10K; 6.9%

The key pairs to watch are EURJPY and EURUSD.

06/27 Thursday // 23:30 GMT: JPY National Consumer Price Index (MAY)

Gauges of Japanese inflation are crucial yardsticks to determine if the BoJ’s policies are working as the end goal is to bolster yearly inflation to +2% by early-2015. Accordingly, although the progress might be slow, any improvements in the headline figure offer a counterpoint to more easing, and would thus be positive for the Yen. A miss here, in light of the Fed’s rate decision and the upcoming diet elections in mid-July, would reinforce recent Yen weakness.

CONSENSUS: -0.4% y/y

PRIOR: -0.7% y/y

The key pairs to watch are EURJPY and USDJPY.

06/28 Friday // 12:00 GMT: EUR German Consumer Price Index (JUN P)

More German data will come out on Friday, which will give a good reading on the German economy when taking in context Monday’s Ifo and Thursday’s labor market data. 10-year German bond yields rose to 1.740% at the time of writing, the highest since April 2012. Retail Sales will show how optimistic German shoppers are feeling. German inflation ratings have been steadily declining since it was +2.8% in November 2011. This time, the Bloomberg News survey expects a yearly CPI change of +1.8%, which is an improvement over May’s +1.6%. Higher inflation rates tend to lead to a stronger currency, so an improvement could support the Euro.

CONSENSUS: +1.7% y/y; Core +1.8% y/y

PRIOR: +1.5% y/y; Core +1.6% y/y

The key pairs to watch are EURGBP and EURUSD.

--- Written by Christopher Vecchio, Currency Analyst and Kevin Jin, DailyFX Research

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.