Major Currencies vs. US Dollar (% change)

25 Jul 201102 Aug 2011

US_Dollar_Outlook_Brightens_Amid_Global_Economic_Slowdown_Fears_body_Picture_5.png, US Dollar Outlook Brightens Amid Global Economic Slowdown Fears

Talking Points

  • EUR: Euro Pressured as Debt Fears Return, Sentiment Sours
  • GBP: Bank of England Rate Decision Likely Non-Event Again
  • JPY: Link with US Treasury Yields Transmitting Risk Trends
  • CAD, AUD, NZD: Stocks Continue Driving the Comm Dollars

The week began on positive note as US lawmakers announced an agreement that would raise the nation’s debt ceiling and begin chipping away at the structural fiscal deficit, but optimism was short-lived as fears of a broad-based global economic slowdown jumped back into the spotlight after Monday’s disappointing US ISM manufacturing data. We’ve talked for some time about a looming deceleration in the recovery as all three of the world’s leading growth engines – China, the EU and the US – show signs of weakness heading into the third quarter, and the markets appear to be catching on.

The slump in sentiment was compounded by continued re-escalation in Euro Zone sovereign risk as markets continued to stress-test the lofty promises of EU policymakers given at last month’s Brussels summit and produced the second Greek bailout. As we discussed last week, traders are keen to challenge policymakers’ pledge to secure private investors in any post-Greece rescue effort (a scenario equivalent to default for all effective purposes) as well as to see if the new powers given to the EFSF bailout fund will be matched with adequate capitalization before resigning to believe in regional stability.

Looking ahead, strong correlations between most major currencies and the MSCI World Stock Index – a proxy for underlying risk appetite – suggest that macro-level themes will remain firmly in control of price action. In the case of the Japanese Yen – the only currency not showing a direct correlation to the global equities benchmark – a firm and growing link between the USDJPY exchange rate and the US-Japan 2-year bond yield spread will act as a transmission mechanism for sentiment trends. Continued risk aversion will drive demand for US Treasury bonds as a standby safe haven asset (particularly now that a US debt deal has been reached), driving prices higher and pressuring both yields and USDJPY lower in the process. Naturally, a recovery in risk appetite will have the opposite effect.

Needless to say, increasingly acute fears that the global recovery will falter through the second half of the year put the spotlight on Friday’s US Nonfarm Payrolls reading, with the leading ADP Employment report and the ISM Non-Manufacturing gauge on tap in the interim. Meanwhile, lingering Euro Zone debt jitters will color the markets’ reaction to the European Central Bank interest rate decision. Rates are expected to remain on hold and traders are likely to be most interested in ECB President Jean-Claude Trichet’s comments on lingering contagion worries at the press conference following the monetary policy announcement. The Bank of England rate decision is almost certainly set to amount to another non-event, with no major changes likely as policymakers remain stuck between soft growth and weak inflation. The central bank’s penchant not to issue a statement along with the announcement will have markets waiting for next week’s updated Quarterly Inflation Report for more insight.

EUR/USD

US_Dollar_Outlook_Brightens_Amid_Global_Economic_Slowdown_Fears_body_Picture_6.png, US Dollar Outlook Brightens Amid Global Economic Slowdown Fears

Source: Bloomberg

Key Upcoming Events

DAY

GMT

EXP

PREV

IMPACT

04 AUG

8:30

Spain Sells 2014 and 2015 Bonds

-

-

Medium

04 AUG

11:45

European Central Bank Interest Rate Decision

1.5%

1.5%

High

04 AUG

12:30

ECB President Trichet Press Conference

-

-

High

05 AUG

10:00

German Industrial Production (MoM) (JUN)

0.0%

1.2%

Medium

05 AUG

10:00

German Industrial Production (YoY) (JUN)

8.1%

7.6%

Medium

GBP/USD

US_Dollar_Outlook_Brightens_Amid_Global_Economic_Slowdown_Fears_body_Picture_7.png, US Dollar Outlook Brightens Amid Global Economic Slowdown Fears

Source: Bloomberg

Key Upcoming Events

DAY

GMT

EXP

PREV

IMPACT

04 AUG

11:00

Bank of England Interest Rate Decision

0.5%

0.5%

High

04 AUG

11:00

BOE Asset Purchase Target (£) (AUG)

200B

200B

High

05 AUG

8:30

Producer Price Index - Output (YoY) (JUL)

5.8%

5.7%

Medium

05 AUG

8:30

Producer Price Index Core - Output (YoY) (JUL)

3.2%

3.2%

Medium

USD/JPY

US_Dollar_Outlook_Brightens_Amid_Global_Economic_Slowdown_Fears_body_Picture_8.png, US Dollar Outlook Brightens Amid Global Economic Slowdown Fears

Source: Bloomberg

Key Upcoming Events

DAY

GMT

EXP

PREV

IMPACT

05 AUG

-

Bank of Japan Interest Rate Decision

0.10%

0.10%

High

USD/CAD

US_Dollar_Outlook_Brightens_Amid_Global_Economic_Slowdown_Fears_body_Picture_9.png, US Dollar Outlook Brightens Amid Global Economic Slowdown Fears

Source: Bloomberg

Key Upcoming Events

DAY

GMT

EXP

PREV

IMPACT

05 AUG

11:00

Net Change in Employment (JUL)

20K

28.4K

High

05 AUG

11:00

Unemployment Rate (JUL)

7.4%

7.4%

High

05 AUG

11:00

Ivey Purchasing Managers Index (JUL)

64.6

68.2

Medium

AUD/USD

US_Dollar_Outlook_Brightens_Amid_Global_Economic_Slowdown_Fears_body_Picture_10.png, US Dollar Outlook Brightens Amid Global Economic Slowdown Fears

Source: Bloomberg

Key Upcoming Events

DAY

GMT

EXP

PREV

IMPACT

None

NZD/USD

US_Dollar_Outlook_Brightens_Amid_Global_Economic_Slowdown_Fears_body_Picture_11.png, US Dollar Outlook Brightens Amid Global Economic Slowdown Fears

Source: Bloomberg

Key Upcoming Events

DAY

GMT

EXP

PREV

IMPACT

03 AUG

22:45

Employment Change (QoQ) (2Q)

0.0%

1.4%

Medium

03 AUG

22:45

Employment Change (YoY) (2Q)

2.0%

1.8%

Medium

03 AUG

22:45

Unemployment Rate (2Q)

6.5%

6.6%

Medium

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