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Risk FX Stabilizes on Talk of Fiscal Union

Boris Schlossberg, Director of Currency Research, GFT

Top Stories

  • UK on holiday resulting in quite Eu trade - talk of closer EU integration
  • AU data suggests further rate cuts
  • Nikkei -1.71% Europe -0.04%
  • Oil at $81.48/bbl
  • Gold at $1618/oz.

Overnight Eco

  • AUD TD Securities Inflation (MoM) 0.0% 0.3%
  • AUD ANZ Job Advertisements (MoM) -4.0% vs. -2.1%
  • EUR PPI (MoM) 0.0% vs. 0.3%
  • EUR Eurozone Sentix Investor Confidence -28.9 vs. -29.1

Event Risk on Tap

  • USD Factory Order Expected at 0.3%

Price Action

  • USD/JPY hover near 78.00
  • AUD/USD steady at .9670
  • GBP/USD quiet near 1.5370
  • EUR/USD fails to make much headway beyond 1.2425

A very quiet night of trade on FX on the first trading day of the week as UK is off on bank holiday resulting in very low liquidity flows during the European session. Risk currencies were generally steady despite the very weak NFP data on Friday with consolidation and short covering the theme of the day after large volatile moves last week.

Talk of possible further fiscal consolidation in the EZ helped steady the euro. Over the weekend financial press reports suggested that European leaders are considering  the creation of a central European authority to manage euro area finances, as well as an expansion of power for the European Commission, European Parliament and European Court of Justice. Such policy would move the EZ towards a much more integrated fiscal union providing much better credit support for the region including the prospect of Eurobonds.

EU leaders will try to agree  to a plan towards a fiscal union at a June 28-29 EU summit, where top European officials including European Council President Herman Van Rompuy will present a set of initial proposals. If EU authorities can come to a consensus on a workable plan, such a move could provide some relief for the euro which remains grossly oversold as sentiment towards the unit continues to be overwhelmingly negative.

On the economic front the calendar was essentially barren with only EZ PPI and EZ investor sentiment data during the European session with neither report having much impact on trade.  In Asian session trade weak Australian job advertisements, declining corporate profits and tame inflation data have all increased the possibility of an RBA rate cut at tomorrow's monthly central bank meeting in Sydney.  Australian job advertisements declined by -2.4% versus -0.8% the period prior suggesting that labor conditions Down Under continue to deteriorate.  Meanwhile corporate profits continued to contract decreasing by 4.0% versus -2.1% eyed. At the same time inflation expectations have been tempered with M1 Inflation gauge remaining flat at 0.0% versus 0.3% rise the month prior.

The overall slowdown in business activity in Australian economy has led most economists to predict that the RBA will ease once again at tomorrow's monthly meeting.  According to the Wall Street Journal poll six out of 20 respondents now expect a rate cut of as much as 50bp, ten economists forecast a  rate cut of 25bp and only four expect the RBA to remain stationary.

With eco calendar quiet in US trade as well, the currency markets will likely take their cue from equities as the day proceeds. Although the NFP data disappointed, the weak labor markets results were likely to be the residue from high oil and gasoline prices earlier in the year.  With now off by more than -25% from its highs the prospect of lower gasoline prices could prove to be simulative to the US economy as the summer progresses infusing investors with a small shot of optimism. Therefore if equity markets recover today risk FX could follow with longs eyeing the 1.2450 and .9750 barriers as their immediate targets on the day.   

FX Upcoming

Currency GMT EST Release Expected Prior
USD 13:45 9:45 ISM New York
USD 14:00 10:00 Factory Order 0.3% -1.5%