Following the disappointment from the lack of US Federal Reserve and European Central Bank (ECB) action last week, the US July jobs report provided a fillip for markets. The stronger than expected jump in payrolls (163k) dampened worries about the pace of jobs recovery while the increase in the unemployment rate (to 8.3%) kept alive hopes of more Fed quantitative easing.
Indeed, even the ECB’s decision and statement last week have been interpreted as merely delaying the inevitable, with stronger action expected from the central bank over coming weeks. Against this backdrop, markets will begin the week in positive tone and risk assets are likely to extend gains early in the week.
The highlights on the data calendar this week include two central bank meetings, Bank of Japan (BoJ) and Reserve Bank of Australia (RBA), and the Bannk of England (BoE) Quarterly Inflation Report (QIR). Major policy changes from the former two central banks are unlikely although the BoJ may decide to abolish the 0.1% minimum bidding rate on JGB operations.
As for the BoE QIR a dovish reading is likely which will help to support expectations of further policy action in the UK, which in turn will mean that GBP will underperform. Data releases are fairly thin on the ground, with US trade data, Q2 non farm productivity, German factory orders and industrial production releases across Europe. Overall, we see little to detract from the positive tone to asset markets.
Risk currencies begin the week on the front foot. The EUR/USD reaction to the US jobs data was particularly interesting, hitting a high of 1.2444 as stop losses were triggered on the upside. Further EUR gains will be difficult to achieve, however. Speculative market positioning reveals that EUR short positions have dropped to their lowest level in several weeks, suggesting less scope for further short covering.
The lack of major data releases over coming days within the Eurozone mean that direction will come from Spain and whether the country formally asks for financial support from the EFSF. In the meantime, EUR/USD is likely to edge back to around technical support around 1.2218.
About Mitul Kotecha
Mitul has worked in the financial industry as a strategist/economist for over 16-years in several corporate and investment banks in London. He has covered a range of financial products including bonds, interest rates, equities and foreign exchange.
He is currently working in Hong Kong for Crédit Agricole Corporate & Investment Bank, wherehe is the head of global currency strategy, in charge of a team of analysts providing research and strategy for the bank’s clients and internal trading and sales teams.
He is regularly consulted by the press/media for my views on markets and economies appearing regularly on business channels such as CNBC, Bloomberg TV, Channel News Asia, and Reuters TV. He is frequently quoted in various newspapers including the Financial Times and Wall St. Journal as well as newswires including Reuters, Bloomberg, Associated Press, Dow Jones and many others.
He is the author of the forthcoming: Chronology of a Crisis (Searching Finance, September 2012)