The US dollar remained on the backfoot and will remain in focus this week, with the Fed set to hit the wires. Last week’s Hilsenrath comments certainly stirred the pot and continue to resonate through the market. Hilsenrath suggested the Fed may lower its 6.5% threshold for unemployment and also possibly change its inflation target. Regardless, we don’t feel the Fed can be any clearer than it already has been and therefore the non-farm payrolls data on Friday might end up carrying a lot more weight. A small drop in the unemployment rate to 7.5% (from 7.6%) is expected and any positive surprises on the employment change are likely to lead to a sharp reversal in the USD.
AUD/USD will also be in focus as it continues to make an attempt at the 0.93 level, and the bulls might be spooked by the fact that RBA Gov Glenn Stevens will be on the wires tomorrow ahead of what some analysts feel will be an August cut. Analysts are quite evenly split on the August decision between a cut and no cut. At the same time, Mr Stevens is likely to continue talking down the AUD and this might see the 0.93 resistance remain intact. While we don’t expect anything new from the BoE and ECB, EUR/USD and GBP/USD remain quite elevated. EUR/USD keeps knocking on 1.33 and GBP/USD knocking on 1.54. On the calendar today we have UK net lending, mortgage approvals and CBI realised sales to look out for.
On the US front, we have pending home sales data due out and we will continue to see QE tapering repricing should data significantly vary from consensus. Japan will also be one to watch and could potentially drive sentiment in Asia all week. The Nikkei fell sharply on Friday as investors experienced disappointment in the inflation numbers released on Friday. Whilst the headline number looked solid, it seems it was mainly driven by a surge in energy costs that were up 6.9%. This put a dampener on expectations that Japan’s deflationary period is over and Abenomics is in full swing. At the same time, the BoJ just seems unlikely to add to stimulus at the moment. Coupled with near term weakness in the USD, Japan came under significant pressure. USD/JPY is now testing 98 and we feel this level has to hold otherwise it’ll be a long week for Japan.
Kuroda will be on the wires today and given the focus on the CPI numbers he is likely to comment on the economic recovery, and this will prove to be market sensitive. We also had Japan’s retail sales come out today with a 1.6% rise (slightly missing an expected 1.7%).