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Risk FX Rallies on Hopes of Dovish Fed

Boris Schlossberg, Director of Currency Research, GFT

Top Stories

  • Australian employment beats
  • UK PMI Services better
  • Nikkei up 1.24% Europe up 0.58%
  • Oil below $85/bbl
  • Gold at $1624/oz.

Overnight Eco

  • AUD Employment Change 38.9K vs. -2.2K
  • AUD Unemployment Rate (MAY) 5.1%
  • AUD AiG Performance of Construction Index 34.7 vs. 34.9
  • JPY Leading Index (APR P)95.1% vs. 95.2%
  • CHF Unemployment Rate (MAY) 3.1%
  • GBP BOE Asset Purchase Target (JUN) n/a
  • GBP Bank of England Rate Decision (JUN 7) n/a
  • GBP Purchasing Manager Index Services (MAY) 53.3 vs. 52.5

Event Risk on Tap

  • USD Initial Jobless Claims (JUN 2) Expected at 380K
  • USD Continuing Claims (MAY 26)
  • USD Consumer Credit (APR) Expected at $10B
  • CAD Ivey Purchasing Managers Index s.a. (MAY) Expected at 52.7

Price Action

  • USD/JPY holds at 79.50
  • AUD/USD rallies to .9950 but stalls
  • GBP/USD better PMI helps lift to 1.5475
  • EUR/USD steady at 1.2550

Risk FX was higher in morning European trade with cable and Aussie leading the way as economic data surprised to the upside and investors awaited Ben Bernanke testimony in Congress in hopes that the Fed Chairman may hint at further monetary stimulus in the near future. Cable rose to 1.5500 in the wake of better than expected services PMI data while Aussie jumped to .9950 on much better than expected employment news. 

Australian employment rose to a whopping 38.9K jobs beating last month’s number of 7K and far exceeding the forecasts of -2.2K decline. The unemployment rate inched to 5.1% but only because participation rate increased. The labor data was particularly impressive because most of the gains were made in full time employment which rose by 46K. Mining jobs continued to drive demand as unemployment in those regions was much lower than the national average with Western Australia seeing jobless rates of only 4.1%.

The positive labor data news comes on the heels of much better than expected Australian GDP numbers and suggests that the RBA may pause in its monetary easing program as the country’s economy performs much better than analysts forecast. The Aussie rose strongly in the wake of the news in Asian session trade but has since stalled at the .9950 level facing heavy selling ahead of the key 1.0000 barrier.  Still, if risk flows continue into North American trade and Dr. Bernanke’s testimony proves supportive the pair will likely test that figure as the day proceeds.

In UK the Services PMI report printed at 53.3 versus 52.5 eyed helping to lift sterling above the 1.5500 level as fears over the slowdown in UK economy receded.  According to Markit  new business accelerated while service sector employment rose at a solid rate, although business confidence fell to a five-month low. Nevertheless,  half of survey respondents said that they expect conditions to remain positive in the year ahead.  Currency traders now awaited the BoE decision with some anticipating a possible additional 50B GBP QE addition coming out of today’s meeting.

In North America the focus rests firmly on Fed Chairman as Dr. Bernanke testifies before Congress. With news stories leaking that the Chairman will adopt an accommodative stance, the markets are primed for dovish commentary from Dr. Bernanke although few analysts believe that he will explicitly call for a third round of QE just yet. Nevertheless, if Dr. Bernanke does not strike a dovish note the markets are likely to be disappointed and could unwind today’s rally in risk if Chairman’s testimony fails to live up to expectation.          

FX Upcoming

Currency GMT EST Release Expected Prior
USD 12:30 8:30 Initial Jobless Claims 380K 383K
USD 12:30 8:30 Continuing Claims 3242K
USD 19:00 15:00 Consumer Credit $10B $21.355B
CAD 14:00 10:00 Ivey Purchasing Managers Index s.a. 52.7 52.7