Market Analysis

FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)

USD

Sentiment stabilised during the Asia session after yesterday’s heavy falls in the euro and the AUD. Silver continued to weaken, but at a far more moderate pace, and gold and oil both managed to claw back some losses. AUD was strongly boosted by renewed RBA hawkishness in the latest quarterly statement of monetary policy. EURUSD traded 1.4510-1.4588, USDJPY 80.00-80.61. US weekly jobless claims came in far higher than expected at 474k. Our economists note that while some of the rise in recent weeks can be explained by transitory factors, claims tentatively suggest a stalling in the pace of labour market improvement. The key test will be today’s payrolls number, and the market’s expectations have likely been dented psychologically by this week’s other figures. Our US economists expect payrolls to come in at +175k (cons. +185k) with +200k (cons. +200k) in private sector jobs creation. The unemployment rate is expected to dip to 8.70%. Canadian jobs figures are also due.

EUR

ECB President Trichet disappointed markets at yesterday’s press conference, only noting that the ECB would “closely monitor” developments, and said risks were ‘balanced’. As a result, the EUR declined sharply against the dollar and across the board.
Our economists still look for a July hike as their base case, but markets are now expressing a greater sense of caution. In hindsight, Trichet stressed twice last month that right now he wasn’t seeing second round effects in the Eurozone, which did knock the EUR, and yesterday’s stance should not have come as such a surprise. Nevertheless, the ECB will remain more hawkish relative to the Fed and this may continue to support the EUR in the immediate future.
JPY

USDJPY clawed back above the key 80.00 level during the Asia session without any obvious assistance from the Ministry of Finance. In fact, Economy Minister Yosano reiterated remarks made yesterday by Finance Minister Noda, describing the latest price action as being largely due to dollar weakness rather then yen strength. This suggests some reluctance to intervene at current levels. Nevertheless, we consider the risk of Japanese FX intervention to be elevated.


GBP

UK services PMI, followed the trend of the other components and declined well below expectations hitting 54.3 (cons. 56). The servicers sector accounts for around 70% of the UK economy and is an important leading indicator for UK growth.
The BoE was on hold, as expected. Investors will now look to the release of the minutes to assess whether there has been a vote shift towards the dovish camp in light of the recent data weakness. We continue to target sterling coming lower in the medium term.


AUD

The latest quarterly statement of monetary policy took on a more hawkish tone, with the RBA noting that “further policy tightening is likely to be required at some point to restrain inflation”.Our Australian economists stick to their view that the RBA’s next rate hike will likely come in August We remain long AUDNZD from 1.3545, targeting a move up to 1.42.