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Dollar May Rise with Risky Assets as Focus Turns to US Jobs Report

Dollar May Rise with Risky Assets as Focus Turns to US Jobs Report

2010-07-02 05:10:00
Ilya Spivak, Sr. Currency Strategist
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Key Overnight Developments

• Risk Appetite Firms as Australian PM Gillard Reaches Mining Tax Deal
US Dollar Breaks with Past Patterns, Rises with Stocks in Overnight Trade

Critical Levels

euroopen070220101

The Euro slid 0.1 percent against the US Dollar in overnight trade while the British Pound was little changed, down a meager 0.01 percent against the greenback. We remain flat EURUSD and GBPUSD.

Asia Session Highlights

euroopen070220101B

With nothing of note on the economic calendar, risk sentiment took center stage in overnight trade. Asian stocks exchanges tracked mostly higher after Australia’s new Prime Minister Julia Gillard reached an agreement on a mining tax with major resource-sector firms. The size of the tax was scaled down to 30 percent (from the 40 percent pushed by the ousted PM Kevin Rudd) and will only apply to profits on sales of iron ore, coal, onshore petroleum and gas (as opposed to the initially proposed broader version).

Interestingly, the currency markets’ reflection rebounding risk appetite was far from typical. While the high-yielding Australian and New Zealand Dollars outperformed as would be expected, the US Dollar – heretofore a staple safe-haven asset – pushed higher while the spectrum of European currencies and the Yen all sold off. While a single trading day is surely not enough to draw firm conclusions, further evidence may show that markets are entering a period wherein comparative interest rate expectations place the greenback on a path parallel to risk appetite, an outcome in line with our long-term fundamental forecast for the US currency.

Euro Session: What to Expect

euroopen070220103

Euro Zone Unemployment figures headline the economic calendar in European hours, with expectations calling for the jobless rate to hold steady at a record-high 10.1 percent in May. A pause in unemployment’s two-year advance would hardly signal brighter prospects for the region however as the coming months bring slower economic growth and an erosion of business confidence in the aftermath of the EU debt crisis. Indeed, policymakers across the region are now making deficit reduction priority and the combined effects of austerity measures and rising borrowing costs – an outcome that goes hand-in-hand with financing large fiscal shortfalls – promises to keep performance lackluster for the foreseeable future. The broad implications of such an outcome for the Euro seem reasonably dire, with the ECB likely to maintain a dovish posture substantially longer than most of its major counterparts.

A separate report is expected to show the Euro Zone Producer Price Index added 0.3 percent in May to put the annual wholesale inflation rate at 3.1 percent, the highest in 19 months. Still, the release seems unlikely to do much for price growth (and thereby monetary policy) expectations after lackluster flash Consumer Price Index figures released earlier this week that showed headline inflation declined to 1.4 percent in June, the slowest in four months.

On balance, traders are likely to look past the European data docket, opting to focus on the US Employment Situation report due late into the session. While the headline Nonfarm Payrolls figure is expected to show that the economy shed 130,000 jobs in June, this is likely to be chalked up to a drawdown of temporary 2010 census workers, with Private Payrolls set to rise by 110,000 – the third-largest increase since the recession trough in January 2009. Traders continue to look to the US as the bellwether of the global economic recovery, particularly now with Europe likely remain hamstrung for the foreseeable future and China stepping up efforts to slow its buoyant economy amid fears of asset bubbles and runaway inflation. This suggests a favorable private payrolls figure may boost risk appetite as well as engineer a recovery in US Fed rate hike expectations, creating a seemingly perverse outcome whereby the stocks and the US Dollar advance in tandem.


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