Payrolls disappoints but troika delights.
EURUSD, EURGBP to extend gains unless ECB blinks.
If RBA unconcerned about China, AUD to outperform.
What could have been a very ugly Friday for risk appetite and potentially dollar supportive failed to transpire as positive news on Greece took the sting out of weak US job data. Non-farm payrolls confirmed the fears sparked by Wednesday’s ADP with a meagre 54k rise in employment and a jump in the unemployment rate to 9.1% from 9.0%. Inevitably markets have been quick to raise the prospect of QE3 and with little data on the calendar focus will be on a series of speeches – the highlights will be Geithner today and Bernanke tomorrow. For now we see the Fed as likely to stick to its view – with which we concur – that the current softness in data is likely transitory, and to re-emphasise the high bar to further QE measures. Nevertheless the USD looks likely to remain under pressure this week.
The announcement from the EU/IMF/ECB troika that an outline agreement had been reached with Greece to secure the next tranche of funding, together with a new aid deal through 2014, provided strong independent support for EURUSD, but should also translate to support for risk-taking in general. But while the outlook for the EUR remains positive over the next few weeks, volatility is likely to persist. The Greek deal is still subject to full political buy-in, and needs to clear parliament this week. MPs from the ruling Pasok party are reportedly looking to debate the package, undoubtedly with one eye on the growing street protests. And a German Finance Ministry spokesman is reported saying that it is ‘not certain’ their will be a second bailout for Greece. And lest the remainder of the periphery be tempted to heave a sigh of relief, the Spanish People’s Party, recent victors in local elections, said over the weekend that the Castilla-La Mancha region is broke and does not have money to pay next month’s salaries. Note too that Spanish industrial production fell by 1.6% in April (-4.1%) y/y, a poor start to Q2 after better than expected Q1 data.
Other potential pitfalls for the EUR would be a failure by the ECB to express ?vigilance? following Thursday’s Council meeting (note here the plunge in the June Sentix investor sentiment index o/n), ahead of the revised ECB staff economic forecast due on Thursday); or a repeat of last Wednesday’s heavy US equity market sell-off. On the latter, we now have a rule of thumb that says intra-day US equity losses need to surpass 1.5% for risk aversion to reach a level where it becomes outright USD supportive. If EURUSD is going higher, EURGBP will go with it such that 0.9000 could well trade this week.
In a quiet Asian session JPY has fared best, flirting with sub-Y80 levels. Y79.50 looks to be a more important line in the sand where if the expected semi-official bids are not forthcoming then yen crosses as well as USDJPY will be subject to capitulation trades given Japanese retail investors have once again built up sizeable yen shorts close to record levels. Lastly, this will be an interesting week for the AUD. If the RBA on Tuesday fails to display the concerns of many observers regarding the speed of the slowdown in China and again signals that an early rate rise is likely, and if Thursday?s employment data shows a strong bounce back after April?s fall, AUDUSD could well prove to be one of the week?s top performers.
BNP Paribas
Corporate & Investment Banking