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FOREX: US Dollar May Give Back Some Recent Gains on Soft Jobs Report

FOREX: US Dollar May Give Back Some Recent Gains on Soft Jobs Report

2011-05-06 07:00:00
Ilya Spivak, Sr. Currency Strategist
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Overnight Headlines

  • Japanese Yen Slumps on Amid FX Intervention Fears
  • Aussie Dollar Soars on Hawkish RBA Quarterly Report

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.4400

1.4789

GBPUSD

1.6317

1.6501

The Euro and the British Pound were little changed in overnight trade, with markets settling in ahead of the upcoming US Employment report (see below). We are looking for a pullback in EURUSD and GBPUSD to yield selling opportunities in the days ahead.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

23:30

AUD

AiG Performance of Construction Index (APR)

37.9

-

39.4

23:50

JPY

Monetary Base (YoY) (APR)

23.9%

-

16.9%

1:30

AUD

RBA Releases Quarterly Economic Forecasts

-

-

-

The Australian Dollar outperformed in overnight trade, rising as much as 1.5 percent on average against its top counterparts, after the Reserve Bank of Australia released a decidedly hawkish Quarterly Economic Forecast report. Policymakers predicted core inflation will stand at 3 percent from the end of this year through mid-2013 and said higher interest rates are “likely to be required”. A Credit Suisse gauge tracking the one-year RBA rate hike outlook jumped 8 basis points to the highest in three months.

The Japanese Yen slumped, down 0.9 percent against the majors, amid intervention fears after the currency strengthened beyond 80 to the US Dollar, a boundary believed to be a line in the sand for policy makers. On balance, such fears appear overstated however, considering the central bank has explicitly said on several previous occasions that their objective was to manage volatility rather than protect a given level for the exchange rate. Indeed, it seems reasonable for Japanese authorities to prefer a stronger Yen over the near term considering the reconstruction effort in the aftermath of the Tohoku quake will require heavy expenditures on imports.

Euro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

5:45

CHF

Unemployment Rate (APR)

3.3%

3.4%

Medium

5:45

CHF

Unemployment Rate s.a. (APR)

3.2%

3.3%

Medium

6:45

EUR

French Central Government Balance (€) (MAR)

-

-28.0B

Low

6:45

EUR

French Trade Balance (€) (MAR)

-6.50B

-6.55B

Low

8:30

GBP

Producer Price Index Input (MoM) (APR)

1.6%

3.7%

Low

8:30

GBP

Producer Price Index Input (YoY) (APR)

16.3%

14.6%

Low

8:30

GBP

Producer Price Index Output (MoM) (APR)

0.7%

0.9%

Medium

8:30

GBP

Producer Price Index Output (YoY) (APR)

5.1%

5.4%

Medium

8:30

GBP

Producer Price Index Output Core (MoM) (APR)

0.3%

0.4%

Low

8:30

GBP

Producer Price Index Output Core (YoY) (APR)

3.0%

3.0%

Low

10:00

EUR

German Industrial Production (YoY) (MAR)

10.3%

14.8%

Medium

10:00

EUR

German Industrial Production (MoM) (MAR)

0.5%

1.6%

Low

Switzerland’s Unemployment Rate is expected to tick lower to 3.3 percent in April, marking the lowest reading in 27 months. The outcome promises to reinforce the recent stream of better-than-expected data out of the mountain nation, bolstering existing upward pressure on interest rate hike expectations along with the Swiss Franc. Indeed, a Citigroup index tracking positive Swiss economic data surprises is holding near a 10-month high. Meanwhile, the SNB said its “ready to take measures necessary to ensure stable prices” and contended that the current, ultra-loose monetary policy “carries long-term risks for prices” last week, giving the strongest indication yet that it was getting ready to unwind stimulus.

UK Producer Price Index figures are set to show that wholesale inflation slowed for the first in seven months in April, dropping to 5.1 percent. Absent a meaningful surprise to the upside, the outcome is unlikely to prove market-moving considering its limited implications for monetary policy expectations after the Bank of England left monetary unchanged for the 25th consecutive month yesterday. In fact, little is likely to change in traders’ interest rate expectations until the release of the latest quarterly inflation report (May 11) as well as minutes from yesterday’s sit-down (May 18).

Likewise, German Industrial Production figures will likely pass with little fanfare. Expectations call for a slowdown in March, with output adding 10.3 percent from the previous year compared with a 14.8 percent increase in the previous month. Still, the reading falls broadly within the range of values recorded over the past year, pointing to relative stability rather than acute deterioration.

On balance, currencies are likely to stay quiet early in the session as markets await the all-important release of the US Employment report. Expectations call for the world’s top economy to add 185,000 jobs in April – marking the smallest increase in three months – while the Unemployment Rate holds steady at 8.8 percent. Traders have been buying the US Dollar this week, with the currency on pace to produce the best five-day run since early January, as markets look ahead to rising US yields after the Federal Reserve firmly pledged to end QE2 in June at last week’s FOMC meeting. It seems reasonable that a soft employment figure may be just the catalyst to engineer some profit-taking into the week-end, with the greenback retracing some of its advance against the majors.

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