Investors require volatility for opportunity and with today’s plethora of economic releases and a European Central Bank (ECB) announcement due on the other side of the Atlantic, the market should be exposed to a significant pre-fireworks display, heightened by a shortened trading day ahead of the Fourth of July celebrations stateside.
With the granddaddy of fundamental releases — nonfarm payrolls (NFP) — being thrown into the mix, it makes today more significant. Now that the so-called weather effect is completely over, today’s NFP report will be important sign of upcoming Federal Reserve policy.
Meanwhile, for ECB chief Mario Draghi and company, it’s their first real showing after last month’s historic meet where the bank threw almost everything it had in its toolkit to ward off the threat of deflation. What can we expect for an encore?
ECB versus Deflation
Do not be fooled, there is much to consider. Though ECB policy officials insist there is almost no chance of deflation taking hold in the eurozone, the latest monthly consumer-price index estimate matched a four-year low of +0.5%, and in some peripheral countries it’s even lower. If the next few inflation readings drift downward from this pit, Draghi may be forced to act — how about cutting the key deposit rate another 15 basis points to -0.25% to give banks even more incentive to lend?
Ultimately, if circumstances don’t press the ECB’s Governing Council into action, reports say the bank’s officials would prefer to take six to nine months to judge whether the new package is creating the desired behavior. The ECB took its time considering negative rates, given that charging banks to sit on money could have unintended consequences, and now that it’s committed to the policy, it will need time to see if banks are following the play as it was drawn up. There is some concern that bankers may undermine the new measures because they are reluctant to boost lending in the next few quarters as their balance sheets are under the heavy scrutiny of the asset quality review.
So by day’s end, no policy changes are expected from the ECB, but the market will be looking for details of the package of easing measures introduced last month. Euro policymakers are expected to keep their ‘dovish’ tone intact, especially in the face of weak purchasing managers’ indexes (PMI), low inflation and weak bank lending, but no action.
Swedish Central Bank Supports the EUR
The 18-member single currency is little changed ahead of the ECB announcement (€1.3655), propped up by AUD selling insistence from the Reserve Bank of Australia (RBA) overnight, and the SEK (Swedish krona) plunging to a three-and-a-half-year low after the Swedish central bank surprised investors this morning with a bigger-than-expected rate cut. The Riksbank lowered borrowing costs for the first time in six months to boost a flagging inflation rate (repo rate cut to +0.25% from +0.75%). The EUR/SEK has weakened by more than +2% (€9.3490). Unless the ECB president attempts to talk down the EUR (see the RBA), or signals that the ECB has made further progress on its asset purchase plan, then it’s unlikely that today’s policy meet will have much impact outright on the EUR. Cross action is doing most of the direct supporting, but the market requires a very convincing NFP reading to move the needle.
The RBA Talks the AUD Down
The Aussie dollar is in its own space at the moment. It’s a half-member to the market’s most popular trade — the carry ($0.9375). Overnight, the AUD/USD is once again the most active cross among the dollar majors, falling sharply for the second consecutive session after hitting an eight month high above AUD$0.95 earlier this week. Mixed China services PMIs have taken a back seat to increasingly more “dovish” sentiment from RBA Governor Glenn Stevens, and the biggest drop in retail sales since March of 2013. Stevens stated that while monetary policy is very accommodative, the RBA still has ammunition on interest rates, adding that AUD is overvalued by most measures and the troubling property sector inflation may be abating. The AUD was seen as the go-to currency of choice from a yield perspective, and it has become a crowed trade fast with many looking to see AUD outright hit parity in the fourth quarter. Stevens needed to put the brakes on the currency; a tool that Draghi has at his disposal. What is complementing the EUR’s value at the moment is the unwinding of so many cross-play trades that it actually ends up supporting the single unit in the short term. Perhaps the biggest squeeze will have to come from the USD, which has been underperforming. An aggressive surprise from this morning’s NFP would be a good start.
Can the Dollar Get a Job Lift?
After the decidedly slow start to the year, monthly NFP reports in the first five months are now averaging over +200k new jobs. That’s enough to keep unemployment on a downward trajectory (+6.3%). Today’s forecast is for another payroll report in line with the average (+215k), though more breakout numbers like the nearly +300k jobs gained in April are not out of the question, and it could help ease the Fed transition into its next policy phase while providing an argument for a stronger dollar across the board.
Both bunds and Treasurys are doing their jobs and pushing lower, taking out some technical support as traders eye a higher-than-expected U.S. jobs report. While consensus hovers around the average, a few dealers are looking for a print between +250k to +290k, making it the largest job gain in 18-months and a boon for market volatility. Numbers like this will allow the Fed to proceed to its next phase with little market objection. A disappointing headline and investors are still exposed to opportunity volatility!
Gold Bugs Brace Themselves
Given yesterday’s ADP employment print coming in well above expectations (+281k versus +205k), positions have likely have likely been adjusted somewhat to account for an upside risk to the June employment report ($1,322). Given the factors all lined up against the yellow metal — positioning, weak physical demand, and potential strong employment — any sign of resilience against stronger data will please the gold bugs. On the flipside, weaker U.S. data will only promote the general hopeful mood that investors have of late toward the metal.
EUR Fails To Kick On After Knockout
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