US Dollar Outlook Hinges on ISM and Jobs Data, Euro Crisis News Flow
Major Currencies vs. US Dollar (% change)
22 Aug 2011 – 31 Aug 2011
- EUR: Debt Crisis, Risk Trends Vie for Control Over Price Action
- GBP: Thin Economic Calendar Leaves Macro Themes in Control
- JPY: Standstill Likely to Continue Amid FX Intervention Fears
- CAD, AUD, NZD: Stock Market Performance Still Key Catalyst
FX markets continue to be driven by broad-based risk sentiment trends, with most major currencies mirroring investors’ expectations for the evolution of the global economic recovery as reflected in benchmark stock indexes. The Japanese Yen continues to be an exception, with links to broad-based macroeconomic trends diminished amid lingering fears of official intervention.
As with last week, the central issue guiding risk appetite is the evolving US Federal Reserve policy outlook, with markets attempting to parse a multitude of clues to see if Ben Bernanke and company will once again ride to the rescue of financial markets as the global recovery slows. Traders hoping for a bold announcement at the Fed Chairman’s speech in Jackson Hole last Friday were disappointed, but a seemingly dovish set of minutes from Augusts’ FOMC meeting appears to have rekindled expectations that another round of stimulus will be unveiled at the September 20-21 sit-down of the rate-setting committee.
Looking ahead, this means the lion’s share of the markets’ attention will be focused on the US economic calendar, with the ISM Manufacturing and Nonfarm Payrolls readings taking top billing. The former report is expected to show the US factory sector shrank for the first time in over two years while the latter yields a paltry 70,000 increase in employment in August. While such dismal outcomes could typically be expected to stoke risk aversion and boost the safe-haven US Dollar against its leading counterparts, a counter-intuitive dynamic may emerge whereby shares rise to the detriment of the greenback following soft economic data as deteriorating conditions are interpreted to make additional stimulus more likely. Chinese manufacturing- and service-sector PMI figures will also be monitored with interest in the context of shaping the global economic outlook.
Elsewhere, the Euro Zone debt crisis remains an important consideration. Indeed, Greece seems to have reclaimed the dubious honor of being the sore spot du jour as Finland threatens to withdraw support for the Mediterranean nation’s second bailout while policymakers in Athens mull scrapping the controversial private investor bond swap, throwing more uncertainty into the mix. Meanwhile, increasingly worrisome leading indicators of economic performance in the currency bloc – confirmed this week with the final revision of German and region-wide PMI data – ought to stoke concerns about the growth implications of deficit-reduction plans that EU leaders unveiled in late July as well as call into question the ability of core countries to continue doling out ad-hoc bailouts to the periphery. Needless to say, this threatens to translate into deepening sovereign instability fears as well as a continued deterioration in the ECB rate hike outlook, weighing on the Euro.
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