Dollar Consolidates in Europe
After a relatively subdued start in Asia, risk appetite suffered in Europe, with the dollar reversing some of its losses, particularly against the high-beta currencies. The JPY continued its grind higher, while GBP hit 32-month highs on a trade-weighted basis.. Although Friday’s weak US Q1 GDP report is not entirely to blame for the recent dollar weakness, it certainly didn’t help the dollar’s cause. Headline US growth slowed to +2.2% annualized rate (cons. 2.5%, prev. 3.0%), and the miss added credibility to Fed Chairman Bernanke’s generally dovish assessment of the economic outlook. Indeed, it seems market expectations of further easing have risen again, with the S&P500 back above 1400 and gold climbing $10/oz shortly after the GDP print. Even though Japan is on holiday for Golden Week USDJPY still dropped to a fresh two-month low of 80.08 overnight, despite the BoJ announcing yet another round of bold policy easing on Friday. We keep our bullish 3m USDJPY forecast of 85 but recognize that upcoming data flow will be a critical determinant of near term direction. PCE inflation is due today, followed by the manufacturing ISM on Tuesday, and jobless claims on Thursday ahead of Friday’s non-farm payrolls report. Always an important number, payrolls will assume an even greater significance on this occasion given ongoing uncertainty over whether the US economy is set to suffer another summer slowdown as it did in both 2010 and in 2011. Our US economics team is on the bullish side of consensus, expecting the unemployment rate to drop to 8.1% (cons. 8.2%) and for the headline payrolls number to come in at +170k (cons. +165k). For the Australian dollar, Tuesday’s RBA policy meeting will be a key focus, preceded by a pair of PMI readings out of China. Our economists expect no change from the ECB on Thursday.
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UBS Investment Bank