Janet Yellen rallies the USD

It promises to be a big week of start of the month economic data releases, but the biggest focus will likely rest with the releases from the US.

Janet Yellen’s comments on Friday rallied the DXY Dollar Index by 0.6% after she said that it would be appropriate to raise rates in the “coming months”. Market probability pricing for a July rate rise lifted to 53.8%, but this looks set to break substantially higher if US data doesn’t disappoint this week. The US Personal Consumption Expenditure (PCE) inflation number on Tuesday, ISM Manufacturing PMI on Wednesday and the Non-Farm Payrolls release on Friday are going to be the biggest releases.

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The G7 meeting wrapped up on Friday with Japanese Prime Minister Shinzo Abe talking up parallels between the current global situation and the 2008 GFC. Some of his strong wording is likely aimed at the domestic political situation as he desperately tries to win a mandate to decisively push back the introduction of Japan’s planned tax hike in April 2017. Some of his advisors told the press that they want to see the tax hike introduced in 2019 over the weekend.

Despite the recent US dollar strength, the Japanese yen refuses to weaken much above the 110 level. Nonetheless, Japanese markets are likely to be buoyed today by Friday’s 0.5% weakening of the currency.

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The ASX will look to hold onto its new 5400 level today after decisively closing above this level on Friday following over nine months of failed attempts.

It will be an important week for Australian economic data as well with the release 1Q GDP on Wednesday. The big question is how much GDP has eased from its surprisingly high 3% growth in 4Q 2015, with the market consensus resting at 2.7% YoY. Much of the growth in 4Q was driven by unexpectedly strong housing construction and it’s uncertain whether the decent export performance in the first quarter will be enough to hold GDP up at these levels.

The Aussie dollar is looking increasingly steady below the US$0.72 level. A trip below US$0.70 may not be far off if we see strong US economic data this week.

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