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Busy, US−holiday shortened week ahead with US ISM, US Employment Report and ECB Rate Decision

Mon, Jun 30 2008, 06:08 GMT
by John Hardy

Saxo Bank

USD starts off week on weak footing as market mulls promised hike from ECB and muted US core inflation data Friday.

MAJOR HEADLINES – PREVIOUS SESSION

• New Zealand May Building Permits out at -42.3%

• UK Jun. GfK Consumer Confidence out at -34 vs. -31 expected and -29 in May.

• Japan Jun. Nomura/JMMA Manufacturing PMI out at 46.5 vs. 47.7 in May.

• New Zealand NBNZ Business Confidence out at -38.7 vs. -49.7 expected.

• Japan May Housing Starts out at -6.5% YoY vs. -3.7% expected

• Japan May Construction Orders out at -25.2% YoY vs. -8.4% in Apr.

THEMES TO WATCH – UPCOMING SESSION

Key Risk Events (All times in GMT)

• Switzerland Q1 Balance of Payments (0700)

• Sweden May Household Lending (0730)

• Norway May Retail Sales (0800)

• UK May Net Consumer Credit and Mortgage Approvals (0830)

• Canada Apr. GDP (1230)

• US Jun. Chicago PMI (1345)

• Australian Jun. AIG Performance of Manufacturing Index (2330)

• Australia May HIA New Home Sales (2330)

• Japan Q2 Tankan Survey (2350)

• Japan May Labor Cash Earnings (0130)

• Australia RBA Cash Target (0430)

Market Comments

The USD weakened further on Friday on a muted core PCE inflation reading. This is the Fed's favorite inflation measure. With the trend toward higher unemployment and continued lack of pressure on wage inflation and core inflation, this gives the market the notion that the Fed will be willing to delay any potential tightening. As EURUSD approaches that all time high recently, we have to wonder if we will see any rehashing or escalation of defensive rhetoric on the USD from the US after the still fairly recent signs of coordinated statements from both the Fed and the treasury. If we look at EURUSD, we note the last line of resistance ahead of the big top approaching in the 1.5800/50 zone. This may give the market a bit of pause until it sees the fireworks Thursday from the ECB and the US employment report (note that the US release will be on Thursday due to the July 4 holiday Friday).

The ECB has done everything in its power of late to emphasize that it will take any policy tightening moves one step at a time and refuses to "pre-commit" on further rate moves. No doubt the ECB council members are eyeing the weak EuroZone economy and strong Euro nervously, even as they beat their inflation fighting drum. So beyond this coming Thursday's virtually guaranteed hike, only the better part of one additional 25 bp hike is priced into the forward expectations for the ECB. On the US side, forward expectations have been sent reeling since mid June, as the market has removed 60-70 bps of tightening expectations for the March EuroDollar. All of this leaves us wondering how much more room there is on the interest rate differential side of the equation for further stretching. In the short term, there may be room for even wider divergence if US data continues to show pronounced weakness as it is likely to. This would delay the projected Fed tightening (there are many who still think the Fed will cut rates later this year - and we tend to agree that this is a distinct possibility, though we're too unsure about the trajectory of commodities to call this a high odds proposition) Only a pronounced slowdown in the commodities bull and sharply weaker numbers all across the EuroZone (especially Germany) would take the steam out of the European front end of the yield curve.

USDJPY is approaching the first key support just below the 106.00 level and almost all of the JPY crosses have finally started to come off on risk aversion with the latest swoon in equity markets. Some of the major indices are now approaching their March lows and the pressure will need to stay on the risk aversion side of the equation for these pairs to continue lower, especially considering the still resilient commodities rally. The quarterly Tankan survey is set for release tonight, but the market seems to give little notice to fundamental Japanese data. EURCHF is also trading close to a big support area just above 1.6000.

GBP has managed to hold its own, and with the weak USD, GBPUSD is trading not far below its 200-day moving average at 1.9990. Much of the recent rally there has likely been a short squeeze - can the market really push this one above the psychologically significant 2.0000 level and maintain it there? Today we get the Mortgage Approval data from the UK for May, and anecdotal signs are out there that the housing market is cratering.

AUDUSD is within a stones throw of its 25-year high again. AUD has done well of late despite many signs of risk aversion due to the focus on commodities. Gold last week saw a spectacular two-day, 50-dollar rally. Still, we wonder how the AUD will fare against the likes of the JPY if this environment of risk aversion continues. This is a very busy week for Australian data with the manufacturing PMI, New Home Sales data and RBA tonight, Retail Sales and Building Approvals on Wednesday, and Services PMI and Trade Balance on Thursday.

Published on  Mon, Jun 30 2008, 06:12 GMT