Major Currencies vs. US Dollar (% change)
27 Jun 2011 – 01 Jul 2011
EUR/USD: ECB Rates Outlook, US Employment Data in Focus
The reemergence of the Euro Zone debt crisis with Moody’s downgrade of Portugal’s debt to junk status just days after it seemed things had settled down in Greece has kept events in the currency bloc central to overall market sentiment and assured the Euro remains aligned with the path of global equities. While this has already produced hefty losses for the single currency, its path for the remainder of the week will hinge on the outcome of the ECB interest rate decision as well as Friday’s US Nonfarm Payrolls report.
For the ECB, policymakers are widely expected to issue another 25bps rate hike, but the move has been priced in for past two weeks (according to data compiled by Credit Suisse) so a particularly strong positive reaction seems unlikely. Indeed, the risks are stacked on the downside if ECB President Jean-Claude Trichet tames his heretofore hawkish rhetoric in the press conference following the announcement, acknowledging slowing growth in the region as well as lingering sovereign debt worries.
The US jobs report is significant primarily in its implications for global economic growth. Last week’s manufacturing-sector data from most of the world’s leading growth engines (Euro Zone, China, Japan, UK) proved disappointing, with only the US ISM survey bucking the trend. The question to be answered now is to what extent that result was a one-off affair or the beginning of a reacceleration in the world’s top economy that keeps the recovery on track even as performance falters elsewhere. A strong NFP reading would likely boost risk appetite, allowing the Euro to drift higher as the safe-haven US Dollar is broadly sold, and vice versa.
GBP/USD: Risk Trends Key, BOE Decision Likely a Non-Event
As with the Euro, risk sentiment trends remain in focus for the British Pound, putting the spotlight on the US Nonfarm Payrolls report and its implications for global growth projections. The Bank of England interest rate decision is likely to yield another non-event as priced-in inflation expectations continue to slide, giving the bank room to argue that elevated headline CPI readings owe to temporary factors. The Euro Zone debt crisis remains an important catalyst, with lingering fears likely to keep Sterling underpinned as a regional alternative to the beleaguered single currency.
USD/JPY: Clear Yen Direction Lacking Amid Conflicting Forces
The spread between US and Japanese 2-year Treasury bond yields remains the core driver of USDJPY. This makes for an interesting dynamic this week as the US jobs report competes with Euro Zone debt fears over the direction of risk sentiment trends. Expectations call for Nonfarm Payrolls to rise 100k in June versus 54K in the previous month. The improvement promises to boost risk appetite, weighing on Treasury bond prices and pushing US yields higher. Meanwhile, lingering Euro Zone fears offer an opposing force, driving safe-haven demand for US debt and keeping a lid on rates. On balance, USDJPY has been broadly range-bound since November 2010 and more of the same appears likely.
USD/CAD, AUD/USD, NZD/USD: Comm Dollars Still Anchored to Stock Prices
The so-called “commodity bloc” currencies remain firmly anchored to stock markets, the reflection of a sensitivity to the trajectory of global economic growth underpinning the trends driving both sets of assets. As elsewhere for the remainder of the week, this puts the spotlight this puts the spotlight on the US Nonfarm Payrolls reading and its implications for global economic growth expectations, but leaves the door open for conflicted price action as Euro Zone debt fears continue to linger.
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