Major Currencies vs. US Dollar (% change)
04Oct 2010 – 08Oct 2010
The US Dollar came under broad-based selling pressure last week on rumors that the Federal Reserve will soon introduce another round of quantitative easing (QE) amid increasingly acute signs of a broad-based cooling in global growth through the second half of the year, with Friday’s disappointing set of US employment figures bolstering the bears’ conviction. Going forward, QE speculation looks likely to remain in the spotlight, with the prospect of renewed stimulus for the world’s top economy becoming the central issue for risk sentiment at large. Perversely, this has meant that poor US data has now become broadly risk-positive in that it supports the case for more QE, and vice versa.
With a fairly light US calendar ahead, this puts the onus on Tuesday’s release of minutes from September FOMC policy meeting as well as a long list of scheduled speeches from Federal Reserve officials. On balance, the speaking schedule looks likely to stoke QE expectations with the influential and notably dovish Vice Chair Janet Yellen and NY Fed President Bill Dudley likely to overshadow remarks from Kansas City Fed President Thomas Hoenig, who may not prove market-moving considering his steadily hawkish posture has surely had ample time to be priced into exchange rates. However, two scheduled speeches from Ben Bernanke will take top billing as traders try to decipher which side of spectrum has greater influence over the Fed Chairman.
On the data front, another mixed batch of US releases is expected, with soft-ish Retail Sales set to be counterbalanced by firmer UofM consumer confidence reading while CPI and PPI results remain within the recent range of outcomes. EURUSD:
Risk sentiment remains the strongest driver of Euro price action. The economic calendar is conspicuously bare, with final revision of September’s German and Euro Zone CPI figures amounting to the only noteworthy items on the docket.
The prospect of additional homegrown QE from the Bank of England has become the top talking point as the UK economy faces formidable headwinds amid a broad-based slowdown in global demand and the onset of the government’s ambitious austerity program. To that effect, it is not surprising that GBPUSD has turned into a barometer for traders’ relative easing expectations, a development neatly reflected in the pair’s strong correlation with the spread between UK and US March 2011 interest rate futures. This means that in additional to the chatter from Fed governors, comments from those on the BOE’s rate-setting MPC will also attract attention. In contrast to the US however, perennial dove David Miles will be outnumbered as a speech from hawkish stalwart Andrew Sentence is reinforced by remarks from the hawkish-leaning Paul Fisher. On the data front, September’s CPI and Unemployment figures are set to print broadly unchanged from the previous month, though core CPI is expected to revisit an eight-month low at 2.6 percent.
The Yen continues to track the spread between US and Japanese bond yields, putting the focus firmly on the markets’ conviction about the likelihood of US QE. Fears about renewed FX intervention from Japanese authorities seem to have faded somewhat after a muted outcome to last week’s G7 and IMF meetings. Last week’s comments from Japanese FinMin Yoshihiko Noda has also helped soothe jittery traders after he said that although the government was ready to take “bold action on currencies, including [further] intervention,” he was not in favor of long-term, large incursion into FX markets. Furthermore, Noda clarified that the authorities are aiming to manage volatility rather than take the Yen to a given exchange rate. Augusts’ Machine Orders and Tertiary Index figures as well as September’s CGPI headline scheduled event risk.
USDCAD, AUDUSD, NZDUSD:
The commodity bloc remains closely tied to risk sentiment, putting the debate about new Fed QE measures at the forefront. Turning to the economic calendar, a short list of second-tier releases is ahead in Australia and Canada although the New Zealand docket looks far more eventful, with the latest Retail Sales and Consumer Prices figures set to cross the wires.
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