- EURUSD defies an okay US payrolls report…
Taking revisions into account, Friday’s US payrolls report was on the strong side of expectations, but markets chose to focus on the fact that much of the fall in the unemployment rate was the result of of a 0.2% drop in the labour participation rate rather than from the addition of jobs. Both the USD and Treasury prices posted net gains in the aftermath of the release, while US equities gave back early-day gains to close near flat. The FX reaction was partly explained by a pre-release run-up in risk, but the bigger, EURUSD-led, USD rally was driven by rumours of an imminent Spanish sovereign rating downgrade (attributed to Fitch, who later issued a denial) and then reports that some US Congressmen were marshalling opposition to any plans to expand the resources of the IMF available to augment the EFSF in defending the integrity of the eurozone. On the day, only the SEK and NOK ended up versus the USD, with CHF the biggest loser..
- ….which may support a sharper recovery if Monday’s Merkozy melody is in tune
The weekend has delivered more in the build-up to the main event on Friday, with the Italian government unveiling a EUR 30bn package of austerity, additional taxes and pension reform a day early. The weekend German press suggests that the Fed might be willing to join with EZ central banks in providing loans to the IMF to boost its resources, contradicting a Friday denial of the same from the US Treasury. Perhaps here, similar to last week’s suggestions of an IMF plan for Italy, it may be that there is ‘no smoke without fire.’ Note Treasury Secretary Geithner travels today to both Frankfurt and Berlin. There were also reports that Germany’s position on the need for PSI to be enshrined in the ESM – the EFSF successor originally planned for 2013 – might be softening, albeit in exchange for much tougher budget rules. While further clarifications on these and other issues will impact markets, today’s highlight will undoubtedly be the Merkel-Sarkozy lunch (12.30 GMT), or more accurately, the expected press conference thereafter. While the two leaders have clearly been communicating more effectively or late, it is equally clear that significant differences in positions remain to be bridged. The German call for automatic sanctions for fiscal rule-breakers – and thereby for the need for Treaty change – jars with the French desire for a more politically driven approach to sanctions. Sarkozy’s challengers for the May Presidency have once again come out strongly against further transfer of sovereignty over budgetary matters, reducing his room for manoeuvre on this issue, but if Merkel and Sarkozy can convince that they are singing from the same songbook – even if not quite yet from the same hymn sheet – then there is every chance EURUSD will recapture Friday’s highs near 1.3550.
- ECB, RBA, BOC decisions also loom large, as too latest batch of China data
In the run-up to Friday’s EU Summit, the RBA policy announcement (Tuesday) and ECB Council meeting (Thursday) will also loom large. A rate cut from the ECB looks a more clear cut decision than for the RBA (in the case of the ECB, the question is more about whether a cut will be 25bp or 50bp – we expect -25 but don’t rule out -50). Indications from the ECB on what it might do by way of enhanced support for the eurozone debt markets may have to wait for a satisfactory outcome from the Summit in terms of the ‘fiscal compact’. We expect -25bp from the RBA and are in a (fairly narrow) majority in doing so. Yet since market pricing for a 25bp cut remains near 100%, there looks to be much more upside for the AUD on a no-change than downside on deliverance of a cut. The latest batch of China numbers will also be important for commodity currencies in general, after some chose to interpret last week’s surprise RRR cut as hint of ‘trouble ahead’. If CPI falls sharply as expected (to around 4.5%) supportive of more easing measures, but activity numbers remain clear of hard landing territory, this could be a boon for AUD, NZD and CAD. Specific risk to the latter comes from Tuesday’s BOC announcement and where either a surprise rate cut or hints of one to come could do damage. US and UK services PMIs, plus final eurozone numbers, kick off this week’s data. The US version should maintain the recent good-news flow.
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