Fed’s Powell & China trade data in focus

US jobs data released at the end of last week will diminish hopes of more aggressive policy rate cuts from the Fed FOMC at its policy meeting at the end of the month. Non-farm payrolls rose by 224,000 last month, beating market forecasts, a sharp improvement from the disappointing 72,000 increase in the previous month.

Despite the stronger than expected reading in June, the Fed is still likely to cut interest rates by 25 basis points amid concerns about a loss of growth momentum, trade tensions against the background of low inflation.  Soft US June CPI releases on Thursday this week will likely confirm the subdued inflationary backdrop.

Markets will be able to garner more clues during Fed Chair Powell’s testimony to Congress on Wednesday and Thursday while Fed FOMC minutes from the last meeting will also provide greater detail on Fed thinking.  Both are likely to help confirm expectations of a 25 basis point cut in rates at the next FOMC meeting.

The USD has recovered some if recent losses, helped at the end of last week but the US jobs report.  Further gains are likely to be limited (with the USD index likely to struggle to break 98.0) though much will depend on Powell’s testimony this week.

Also in focus this week will be China’s June trade data.  This data will be scrutinised in particular, for the trade surplus with the US and whether there are any signs of this surplus beginning to narrow.  The data will also give some indications of the health of China’s economy, with another weak print for imports, likely to show further softening in China’s growth momentum. Similarly weaker exports will highlight the softening in demand from key trading partners such as Korea.

Further evidence on the outlook for China’s economy will be seen in the release of monetary aggregates including new loan growth and aggregate financing. Meanwhile, China’s currency continues to remain stable amid the trade truce with the US.


US dollar on a firm footing

The stronger than expected US February jobs report (227k versus 210k consensus) and the Greek debt swap should by rights have set a positive tone to markets this week. Unfortunately this is not the case and cautious is set to prevail, with sentiment dampened in part by China’s wider than expected $31.5 billion trade deficit posted in February.

Officials in Europe are set to finalise Greece’s second bailout today but sentiment is unlikely to be boosted as various concerns creep into the market. Growing scepticism about the fact that the Greek bailout fails to correct the country’s underlying problems, worries about whether Portugal will follow in Greece’s wake, fiscal slippage in Spain and the Irish referendum, all point to ongoing tensions in the weeks ahead.

The Federal Reserve FOMC meeting takes centre stage over coming days while data releases including retail sales, industrial production and manufacturing surveys will also prove important for USD direction. The USD reacted positively to the lack of quantitative easing (QE) hints by Fed Chairman Bernanke recently and the stronger than expected February jobs report has reinforced this view.

The USD starts the week on a firm footing but could face renewed pressure if the FOMC statement proves to be more ambiguous on the issue of QE. US data releases will reinforce signs of economic recovery and if they play into a ‘risk on’ tone the USD could suffer. We believe this is unlikely however, with risk assets set to correct lower over coming weeks, playing positively for the USD.

Having rallied following the growing optimism over the Greek PSI debt swap the EUR will find limited support in the days ahead. News of 85.8% participation will have come as relief but the use of collection action clauses (CAC) is not so positive. At least finalisation of the second Greek bailout will now move ahead, with officials set to rubber stamp the deal today.

Data releases such as the March German ZEW survey tomorrow will highlight the sharp turnaround in investor confidence following the ECB’s LTRO and progress on Greece. This would usually bode well for the EUR. However, it is already proving to be a case of buy on rumour, sell on fact outcome for the currency. Potential for a drop below support around EUR/USD 1.3055 is growing as the USD builds momentum.

Following February’s surprise decision by the Bank of Japan to expand its asset purchases and set an inflation goal, the outcome of the policy meeting on Tuesday will deliver few punches. Having weakened in the wake of the last BoJ meeting, partly as a result of higher US bond yields relative to Japan, the JPY threatens to pull back against the USD to support around 80.50.

Improved risk appetite has helped to maintain some pressure on the JPY but this impact ought to prove limited unless yield differentials continue to widen. While the BoJ’s actions will likely keep Japanese government yields supressed, JPY direction will continue to be dictated by the gyrations in US bond yields.

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