Most of the major currencies are trading higher against the U.S. dollar this morning which suggests that investors have finally reached their pain threshold. Unfortunately the persistent gains in the Japanese Yen indicates that some investors remain risk averse and they have good reasons to be because outside of a much needed relief rally and pullback in European bond yields, there is nothing to support the recovery in the euro and other high beta currencies. Perhaps this is the reason why the rallies have been so modest. There is no question that the decline in 10 year Spanish bond yields is encouraging. If yields continued to rise towards 7 percent, we would be in big trouble this morning with all of the major currencies trading much lower. At the start of the Asian trading session, the EUR/USD fell to a fresh 22 month low while USD/CHF climbed to a fresh 17 month high. Since then the EUR/USD recovered significantly but is struggling to hold onto its gains.
The state of the U.S. labor market is in focus with the release of a number of leading indicators for Friday's non-farm payrolls report. Two of the three reports point to weakness in the labor market but given the low level of jobless claims in May compared to April, we are still looking for non-farm payrolls to rise. According to Challenger Grey & Christmas, layoffs increased to 66.7 percent year over year from 11.2 percent. Strains in the financial markets and the global economy pushed planned layoffs to an 8 month high. Private sector payroll provider ADP reported an increase of 133k workers on U.S. payrolls last month compared to 113k in April. While ADP does not have the best record of tracking NFPs, it has been relatively reliable directionally. Jobless claims ticked up to 383k from 373k which is discouraging but if we look at the month as a whole, claims are still lower in May compared to April. U.S. GDP growth was revised down to 1.9 from 2.2 percent in the first quarter. This was in line with expectations but the mix of revisions were a tad surprising because personal consumption was revised lower while the price index was revised higher. In other words, consumer demand was slightly weaker than expected while inflationary pressures were slightly stronger.The big event risk this afternoon will be Ireland's referendum on the EU fiscal pact. If Ireland rejects the pact, they will not be able to access ESM funding. The results should be released shortly after the polls close at 5pm ET or 21 GMT.