Major Currencies vs. US Dollar (% change)
23Aug 2010 – 27Aug 2010
General Comment:
Risk sentiment remains in focus amid increasing uncertainty about the continuity of the global economic recovery as most of its engines look increasingly faulty: Europe is likely to be sidelined as it works to unwind its sovereign debt burden, Japan remains mired in deflation, China is willfully pulling on the breaks amid fears of overheating, and the recent batch of US data forcefully argues for a substantial slowdown in the second half of the year.
As before, this means the US economic calendar remains in focus as traders look to the health of the world’s largest consumer market as the bellwether for the global recovery at large, and the docket has no shortage of significant event risk. The spotlight will understandably fall on the employment report due on Friday, with expectations calling for the typically market-moving Nonfarm Payrolls figure to show the economy shed 100,000 jobs in August, marking the smallest decline since the metric turned negative for the first time this year in June. However, traders may be more concerned with the Private Payrolls result, a gauge undistorted by volatility in census-related hiring to give a more accurate reading on the underlying strength of the labor market. Here, the outcome looks less encouraging, with expectations calling for a gain of 47,000 jobs, down from the previous month’s 71,000 increase. Elsewhere, forecasts point toward a dour outlook: indeed, the ISM gauge of manufacturing growth is expected to decline for the fourth consecutive month while negative readings on Pending Home Sales and Construction Spending figures reinforce last week’s disappointing housing data.
EURUSD:
The correlation between the Euro and the MSCI World Stock Index remains firm, linking the single currency with the ups and downs of Wall Street once again. German Unemployment figures and the European Central Bank interest rate decision headline the domestic calendar. The jobless rate is set to hold unchanged at 7.6 percent, matching the 20-month low reached in the previous month. While this seems to point toward resilience in the Euro Zone’s largest economy, it is important to note that much of Germany’s rebound in the aftermath of the 2008 meltdown has owed not to domestic consumption but to exports, the prospects for which look decidedly bleak of late amid increasingly ominous signs of a worldwide slowdown in the second half of this year.
Furthermore, the implications of a strong German economy for ECB monetary policy and thereby the Euro are not clear cut considering the lack of symmetry between the currency bloc’s members. Looking at Euroland’s top three economies, French and Italian unemployment is expected to come in substantially higher than that of Germany in the year ahead. Looking further down the list, the disparity between Germany and Spain – the region’s fourth-largest economy – is forecast to top 12 percent this year and in 2011. Such wide divergences make setting a unified monetary policy that encourages growth and controls inflation a difficult task to say the least, hinting that continued outperformance in Germany may only serve to underscore the Euro Zone’s structural vulnerabilities and actually hurt the single currency.
The likelihood of a static monetary policy will be reinforced by preliminary Euro Zone Consumer Price Index figures, with expectations calling for the annual inflation rate to decline to 1.6 percent in August. The outcome points to tepid price growth that is both comfortably below the target 2 percent but not so low as to bring up the specter of deflation, amounting to little urgency to act on the part of Jean-Claude Trichet and company.
Source: Bloomberg
GBPUSD:
Although the correlation between the Pound and the MSCI World Stock Index has continued to come off from last week, risk trends remain the dominant catalyst for price action. The domestic calendar is largely uneventful beyond Wednesday’s release of the Manufacturing PMI reading, which is set to show industrial sector growth slowed for the third month in August.
Source: Bloomberg
USDJPY:
Prices continue tracking closely with US Treasury yields, keeping the focus on US economic data and once again indirectly aligning the pair with risk appetite as overall confidence and the US rates outlook continue to hinge on the same set of near-term developments. An emergency Bank of Japan policy meeting early in the week failed to produce fireworks despite continued jawboning about imminent FX intervention from Japanese officials, hinting the markets may grow numb to future threats until policymakers actually pull the trigger. On balance, intervention-era bigwigs have been on the wires saying the Yen is not expensive in real terms considering the economy has been in deflation for much of the past two decades, and the SNB’s recent experiment in trying to guide EURCHF proved less than successful, hinting recent threats may be little more than political bluster for the benefit of the domestic audience. The docket of significant home-grown event risk is largely bare after Monday’s plethora of releases which failed to spark meaningful volatility.
Source: Bloomberg
USDCAD, AUDUSD, NZDUSD:
The commodity bloc remains closely tied to risk sentiment with prices continuing to show significant correlations to the MSCI World Stock Index (CAD: 0.78, AUD: 0.79 and NZD: 0.78). Indeed, despite an aggressive unwinding of rate hike expectations over recent weeks, the commodity bloc still looks more attractive than the remainder of the G10 from a carry trade perspective, leaving the link with risk appetite largely undisturbed (at least for now). Australian and Canadian Gross Domestic Product figuresheadline the economic calendar.
Source: Bloomberg
Source: Bloomberg
