The Aussie has been rallying passively on rallies in risk appetite and commodities. In the meantime, the RBA view has remained relatively stagnant – will tonight’s RBA meeting throw up a red flag for the Aussie bulls? Also – it’s showtime for the ECB this Thursday as EURUSD is perched ahead of key resistance.
The USD suffered on Friday after the US employment report was relatively in-line with expectations and slightly negative from an worker earnings’ perspective. Meanwhile, the continued rally in commodities and risk provided another source of pressure on the greenback. The New York Fed’s Dudley was also out with very clearly dovish rhetoric as well on Friday, saying that the Fed is “still very far away” from being where it needs to be in terms of its dual inflation/employment mandate and that there is no “reason to reverse course”. This countered the recent spate of more hawkish comments from other Fed officials, which had failed to do much for the greenback’s cause in the first place, as it seems other central bank expectations – particularly in Europe, have largely kept track with the adjustments to those for the Fed. This Thursday is likely to see the ECB moving on rates for the first time.
Euro Outlook
The market voted strongly on Friday for a focus on the potential for the ECB to raise rates in the coming months, rather than fretting the outlook of the sovereign debt situation and its bearing on the EuroZone’s banking system. EURUSD snapped back higher after selling off in the wake of the hawkish rhetoric and the US employment report on Friday. This Thursday’s ECB meeting is the obvious event risk of note that tests whether the Euro remains comfortable at these levels and looks for whether the current pricing of forward expectations is justified by Trichet’s rhetoric at the press conference. Meanwhile, spreads on sovereign debt outside the “troubled trio” have been steadily improving over the last month, buttressing the more positive Euro picture. Longer term, though, it appears that Euro officialdom is mostly employing delaying tactics in dealing with the sovereign debt situation and it will be interesting to see how the market deals with the potential for Irish demands for haircuts on debt holders.
RBA preview
The RBA meeting will be interesting tonight as RBA rate expectations haven’t gone much of anywhere lately – only passively a bit higher and not at all keeping up with the expectations for the major European central banks and the US Federal Reserve. The Aussie has been rallying steeply across the board seemingly on carry themes (AUDJPY an obvious focus) and the related rally in risk appetite and commodities. Not coincidentally, BHP Billiton, the Aussie mining giant, is trading at a new This week is an important one on for Aussie data, with the RBA, AiG Services survey and Trade Balance all set for release tonight (Tuesday in Australia). Later this week we have home lending data on Wednesday, and a construction survey and employment report on Thursday. The data out of Australia has been relatively lack-luster and one wonders if the RBA will remind the market that it has warned before that it includes the currency’s strength in its policy calculus. Or does the market even care much about the rate outlook considering the focus on the other themes? Regardless, tonight would seem the ideal event risk setup for at least a short term Aussie consolidation after the furiously steep rally of the last couple of weeks since the post-Japanese tsunami trough in the currency.
Looking ahead
We’ve got an interesting week ahead, with the RBA meeting tonight and ECB and BoE meetings set for Thursday while EURUSD is flirting with its highest levels since the beginning of 2010. Also, we’ve just transitioned to a new financial year in Japan on the heels of a blowout sell-off in the JPY. Later this week, we’re also possibly faced with a shutdown of the US government as the Democrats and Republicans wrangle over the budget as the debt ceiling has been reached once again.
The Republicans are also out talking up new budget proposals for the coming 10 years that include $4 trillion in cuts, including attempts to cut spending on Medicaid and Medicare. While these cuts are still far too shallow relative to the magnitude of the budget deficit, it is interesting to see the first attempt to grapple with the “untouchable” entitlements, which are the areas that need to be cut if the US is ever to balance its budget. Stay tuned: if the USD is avoid collapse in coming years, we’ll need to see further signs that US politicians are willing to take on the entitlement programs (and that the US voters will allow them to do so!).
The intermarket picture is very interesting at the moment as well. The sharp rally in bonds late Friday and continuing today ahead of the US open is particularly noteworthy relative to the simultaneous strength in commodities and risk – there’s something very incongruous about this and any rally in fixed income has to be considered at least a short-term support for the forlorn JPY, at least as long as that strength in bonds lasts. At the same time, we’re approaching the highs for the year in the US equity market, emerging market equities have just blasted to new highs, and silver has also pushed to a new generational high while gold is perched just under its all-time high.
The USD suffered on Friday after the US employment report was relatively in-line with expectations and slightly negative from an worker earnings’ perspective. Meanwhile, the continued rally in commodities and risk provided another source of pressure on the greenback. The New York Fed’s Dudley was also out with very clearly dovish rhetoric as well on Friday, saying that the Fed is “still very far away” from being where it needs to be in terms of its dual inflation/employment mandate and that there is no “reason to reverse course”. This countered the recent spate of more hawkish comments from other Fed officials, which had failed to do much for the greenback’s cause in the first place, as it seems other central bank expectations – particularly in Europe, have largely kept track with the adjustments to those for the Fed. This Thursday is likely to see the ECB moving on rates for the first time.
Euro Outlook
The market voted strongly on Friday for a focus on the potential for the ECB to raise rates in the coming months, rather than fretting the outlook of the sovereign debt situation and its bearing on the EuroZone’s banking system. EURUSD snapped back higher after selling off in the wake of the hawkish rhetoric and the US employment report on Friday. This Thursday’s ECB meeting is the obvious event risk of note that tests whether the Euro remains comfortable at these levels and looks for whether the current pricing of forward expectations is justified by Trichet’s rhetoric at the press conference. Meanwhile, spreads on sovereign debt outside the “troubled trio” have been steadily improving over the last month, buttressing the more positive Euro picture. Longer term, though, it appears that Euro officialdom is mostly employing delaying tactics in dealing with the sovereign debt situation and it will be interesting to see how the market deals with the potential for Irish demands for haircuts on debt holders.
RBA preview
The RBA meeting will be interesting tonight as RBA rate expectations haven’t gone much of anywhere lately – only passively a bit higher and not at all keeping up with the expectations for the major European central banks and the US Federal Reserve. The Aussie has been rallying steeply across the board seemingly on carry themes (AUDJPY an obvious focus) and the related rally in risk appetite and commodities. Not coincidentally, BHP Billiton, the Aussie mining giant, is trading at a new This week is an important one on for Aussie data, with the RBA, AiG Services survey and Trade Balance all set for release tonight (Tuesday in Australia). Later this week we have home lending data on Wednesday, and a construction survey and employment report on Thursday. The data out of Australia has been relatively lack-luster and one wonders if the RBA will remind the market that it has warned before that it includes the currency’s strength in its policy calculus. Or does the market even care much about the rate outlook considering the focus on the other themes? Regardless, tonight would seem the ideal event risk setup for at least a short term Aussie consolidation after the furiously steep rally of the last couple of weeks since the post-Japanese tsunami trough in the currency.
Looking ahead
We’ve got an interesting week ahead, with the RBA meeting tonight and ECB and BoE meetings set for Thursday while EURUSD is flirting with its highest levels since the beginning of 2010. Also, we’ve just transitioned to a new financial year in Japan on the heels of a blowout sell-off in the JPY. Later this week, we’re also possibly faced with a shutdown of the US government as the Democrats and Republicans wrangle over the budget as the debt ceiling has been reached once again.
The Republicans are also out talking up new budget proposals for the coming 10 years that include $4 trillion in cuts, including attempts to cut spending on Medicaid and Medicare. While these cuts are still far too shallow relative to the magnitude of the budget deficit, it is interesting to see the first attempt to grapple with the “untouchable” entitlements, which are the areas that need to be cut if the US is ever to balance its budget. Stay tuned: if the USD is avoid collapse in coming years, we’ll need to see further signs that US politicians are willing to take on the entitlement programs (and that the US voters will allow them to do so!).
The intermarket picture is very interesting at the moment as well. The sharp rally in bonds late Friday and continuing today ahead of the US open is particularly noteworthy relative to the simultaneous strength in commodities and risk – there’s something very incongruous about this and any rally in fixed income has to be considered at least a short-term support for the forlorn JPY, at least as long as that strength in bonds lasts. At the same time, we’re approaching the highs for the year in the US equity market, emerging market equities have just blasted to new highs, and silver has also pushed to a new generational high while gold is perched just under its all-time high.
Economic Data Highlights
China Mar. Non-manufacturing PMI out at 60.2 vs. 44.1 in Feb.
UK Mar. Lloyds Employment Confidence out at -65 vs. -68 in Feb.
UK Mar. Construction PMI out at 56.4 vs. 54.8 expected and 56.5 in Feb.
EuroZone Apr. Sentix Investor Confidence out at 14.2 vs. 16.0 expected and 17.1 in Mar.
EuroZone Feb. PPI out at +0.8% MoM and +6.6% YoY vs. +0.8%/+6.7% expected, respectively and vs. +5.9% YoY in Jan.
China Mar. Non-manufacturing PMI out at 60.2 vs. 44.1 in Feb.
UK Mar. Lloyds Employment Confidence out at -65 vs. -68 in Feb.
UK Mar. Construction PMI out at 56.4 vs. 54.8 expected and 56.5 in Feb.
EuroZone Apr. Sentix Investor Confidence out at 14.2 vs. 16.0 expected and 17.1 in Mar.
EuroZone Feb. PPI out at +0.8% MoM and +6.6% YoY vs. +0.8%/+6.7% expected, respectively and vs. +5.9% YoY in Jan.
Upcoming Economic Calendar Highlights (all times GMT)
US Fed’s Evans to Speak (1330)
US Fed’s Evans – CNBC Interview (1915)
US Fed’s Bernanke to Speak on Clearinghouses (2315)
Australia Mar. AG Performance of Services Index (2330)
Australia Feb. Trade Balance (0130)
Australia RBA Cash Target (0430)
US Fed’s Evans to Speak (1330)
US Fed’s Evans – CNBC Interview (1915)
US Fed’s Bernanke to Speak on Clearinghouses (2315)
Australia Mar. AG Performance of Services Index (2330)
Australia Feb. Trade Balance (0130)
Australia RBA Cash Target (0430)
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