Dollar On The Ropes
The US dollar sold off across the board on Friday after Italy managed to auction bonds successfully despite Spain’s downgrade by S&P earlier. A weak US GDP report for Q1 inflicted further damage, leading to another round of dollar selling. Headline US growth slowed to +2.2% annualised rate (cons. 2.5%, prev. 3.0%). 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. USDJPY remains heavy too as a result, despite the BoJ announcing yet another round of bold policy easing on Friday. Although the pair eventually managed to scramble higher in the wake of the policy announcement itself, falling US yields eventually got the upper hand, and took USDJPY back down to a two-week low. We keep our bullish 3m USDJPY forecast of 85 but recognize that upcoming data flow will be a critical determinant of near term direction. On that front, there is no shortage of potential triggers this week with PCE inflation due today, 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.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank