US Dollar Gains on Haven Demand in Asia, Bernanke in Focus Ahead

Talking Points

• Dollar, Yen Rise as US Jobs and Chinese CPI Data Spark Risk Aversion
• Emerging QE3 Hopes May Weigh on Dollar, Bernanke Speech in Focus

The US Dollar and Japanese Yen rose against their major counterparts to start the trading week as stocks declined, boosting demand for the go-to safe haven currencies. The MSCI Asia Pacific regional benchmark index slid 0.6 percent as investors reacted to Friday’s disappointing US employment report that showed the world’s top economy added just 120,000 jobs in March, falling short of the 205,000 increase expected.

A larger-than-forecast increase in Chinese CPI also contributed to the sour mood. The annual inflation rate accelerated to 3.6 percent, topping forecasts for a print at 3.4 percent and hinting Beijing will not be quick to offer additional stimulus as the economy’s crucial export sector faces headwinds from a burgeoning recession in the Eurozone.

Looking ahead, top European markets are closed for the Easter Monday holiday but early indications point to continued risk aversion as Wall Street comes online. S&P 500 stock index futures are down nearly a full percentage point, suggesting selling pressure will carry forward as North American traders get their first real chance to react to Friday’s jobs numbers (only futures markets were open in the immediate aftermath of the announcement, and only very briefly).

While the risk-off mood proved supportive for the greenback in Asian trade, it is unclear how the Dollar will fare going forward if the outcome meaningfully rekindles QE3 expectations. Near-term correlation studies suggest the benchmark currency has become increasingly correlated with 2-year Treasury yields recently, a development that makes sense in the context of upgraded Fed rhetoric on the prospects for recovery that emerged in officials’ public commentary and with the March FOMC policy meeting. This means that if yields decline as traders mull the possibility of new efforts monetary stimulus efforts, the Dollar may follow suit.

With relatively little on the US economic calendar, markets are likely to look scheduled comments from Fed Chairman Ben Bernanke to get their bearings. The central bank chief will be speaking at the 2012 Financial Markets Conference in Georgia, and while the topic of conversation is expected to a lecture on "Fostering Financial Stability", some mention of Friday’s jobs report may certainly make an appearance. With that in mind, traders will be keen to dissect Bernanke’s commentary for any clues as to whether the announcement has made QE3 any more of a possibility.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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