Major Currencies vs. US Dollar (% change)

11 Jul 201115 Jul 2011

Currency_Markets_Driven_by_Euro_Zone_Turmoil_US_Debt_Ceiling_Debate_body_Picture_5.png, Currency Markets Driven by Euro Zone Turmoil, US Debt Ceiling Debate

EUR/USD: Euro Vulnerable Ahead of EU Summit on Soft Data

The centrality of the Euro Zone debt crisis for overall market sentiment continues to assure a firm link between EURUSD and the MSCI World Stock Index, a proxy for broad-based trends in investors’ optimism. This week, the spotlight is pointed at a Thursday meeting of the EU heads of state as they attempt to hammer out a confidence-boosting solution to the Greek fiasco.

In the interim, the preliminary set of July’s PMI figures is set to show continued slowdown in manufacturing- and service-sector growth while Germany’s business confidence gauge puts sentiment at the lowest since January 2010 over the same period. This ought to reinforce expectations of a pause in ECB interest rate hikes for the time being, keeping the Euro broadly under pressure.

Currency_Markets_Driven_by_Euro_Zone_Turmoil_US_Debt_Ceiling_Debate_body_Picture_6.png, Currency Markets Driven by Euro Zone Turmoil, US Debt Ceiling Debate

Source: Bloomberg

GBP/USD: US Data Key as BOE Rates Outlook Remains Static

While the correlation between GBPUSD and the MSCI World Stock Index is not eye-catching in and of itself, risk sentiment remains the most-pronounced of the conflicting catalysts driving the British Pound. Interest rate expectations seem likely to take over the spotlight this week however as the Bank of England releases minutes from the monetary policy meeting held earlier this month. The aggressive deterioration in UK economic data in June may have planted the seeds of a dovish shift on the rate-setting MPC committee, and any indication of growing support for another round of QE is likely to weigh heavily on Sterling.

Currency_Markets_Driven_by_Euro_Zone_Turmoil_US_Debt_Ceiling_Debate_body_Picture_7.png, Currency Markets Driven by Euro Zone Turmoil, US Debt Ceiling Debate

Source: Bloomberg

USD/JPY: Sentiment Trends Key as Yen Tracks Treasury Yields

The spread between US and Japanese 2-year Treasury bond yields remains the core driver of USDJPY. With no serious waves likely to be made in the outlook for Japanese rates, this puts the onus on the US portion of the rates differential. Broadly speaking, this points toward three leading catalysts: the Euro Zone debt crisis, the lingering debate on raising the US debt ceiling, and the second-quarter corporate earnings reporting season.

So far, positive earnings surprises have outpaced negative ones by over 9 percent among those S&P 500 companies that have already reported (22 in total); if this trend continues, risk appetite ought to prove somewhat supported and US yields should rise as safe-haven demand for Treasuries declines and prices retreat, pushing USDJPY higher. Needless to say however, this can only be truly relied upon unless an eye-catching headline regarding either the Euro Zone debt fiasco or the US one grab center stage. The former will almost certainly do so on Thursday as EU heads of state convene to hash out the Greek situation in Brussels. The latter remains a wildcard as Republicans and Democrats continue to jostle for political points, with no sign of an end to the deadlock yet in sight.

Currency_Markets_Driven_by_Euro_Zone_Turmoil_US_Debt_Ceiling_Debate_body_Picture_8.png, Currency Markets Driven by Euro Zone Turmoil, US Debt Ceiling Debate

Source: Bloomberg

USD/CAD, AUD/USD, NZD/USD: Comm Bloc Still Anchored to Stock Markets

The so-called “commodity bloc” currencies remain firmly anchored to stock markets, reflecting a shared sensitivity to the trajectory of broad-based global economic growth expectations. As with the Yen, this puts the trinity of familiar macroeconomic drivers – the Euro Zone debt crisis, the US debt ceiling debate, and the second-quarter earnings season – firmly in focus, with the overall implications largely the same as discussed above.

Specifically, if corporate profits dominate attention, there seems to be a good chance for upside in commodity bloc as shares recover, but there is clearly no reason to assume this will prove to be the case (or is necessarily probable, for that matter). The Bank of Canada interest rate decision headlines the calendar. No changes to existing policy are expected, and traders will be keep a close eye on how policymakers frame the recent uptick in headline inflation readings to shape their outlook going forward.

Currency_Markets_Driven_by_Euro_Zone_Turmoil_US_Debt_Ceiling_Debate_body_Picture_9.png, Currency Markets Driven by Euro Zone Turmoil, US Debt Ceiling Debate

Source: Bloomberg

Currency_Markets_Driven_by_Euro_Zone_Turmoil_US_Debt_Ceiling_Debate_body_Picture_10.png, Currency Markets Driven by Euro Zone Turmoil, US Debt Ceiling Debate

Source: Bloomberg

Currency_Markets_Driven_by_Euro_Zone_Turmoil_US_Debt_Ceiling_Debate_body_Picture_11.png, Currency Markets Driven by Euro Zone Turmoil, US Debt Ceiling Debate

Source: Bloomberg

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