Publication date: 6 June 2011 Author: Andrew Timothy Robinson, Saxo Bank Following an extremely poor U.S. employment report on Friday it was a tug of war competition between the risk-off theme(USD higher), and concerns of a possible U.S. double-dip and hence heightened QE3 expectations (USD lower). In the end the weak USD theme won, with losses against the EUR particularly high as the market hoped for better news for Greece’s bailout deal as the weekend approached. Those hopes proved correct as news filtered through of a reworked aid deal (conditional on a new medium-term economic plan with stringent austerity measures attached) and the EUR touched new highs for the month. The long-awaited U.S. employment report conformed to the recent releases of weak ADP reports and deteriorating weekly jobless claims data. Only 54k jobs were added in May, far worse than the already pessimistic estimates, while the unemployment rate rose to 9.1%, its highest this year with an unchanged participation rate. A disastrous result, raising concerns of an extended soft patch in the U.S. recovery which drew little comfort from a better-than-expected non-manufacturing ISM number (54.6 from 52.8 last and 54.0 expected). Softer U.S. yields (10-year benchmark slid as low at 2.945%) post-data helping to lead the dollar lower as well, reaching its lowest level since May 5 versus the index. Since the open this morning we have seen an extension of Friday’s trade with the EUR triggering small stops above 1.4650 and the dollar 0.1% lower. The EUR also found support from the weekend Portuguese election results where a majority coalition between the Social Democrats and Conservatives was announced. With all three parties supporting the EU/IMF bailout the only risk would have been a hung parliament. Preventing the EUR from accelerating away was a Financial Times article reporting that the incoming administration of the Popular Party is claiming that the central Spanish region of Castilla-La Mancha was “totally bankrupt”, deepening concerns about Spain’s true debt levels. Holidays in New Zealand, Hong Kong, China, South Korea and Taiwan kept Asian activity subdued today though there still seemed to be a bias to play the QE3 trade. Data-wise, Australia’s TD Securities inflation gauge showed a more subdued increase in May (+0.2% m/m from +0.3% last time) while the ANZ job advertisements was the more worrying with advertisements falling 6.5% m/m and a downward revision to the previous month raising concerns that the recovery may be faltering. Will the RBA take this (and other data) into consideration at tomorrow’s rate meeting? Europe also has a relatively quiet session on the data front with EU Sentix investor confidence and Euro-zone PPI on tap while we have early speeches from Fed’s Plosser and ECB’s Constancio. The North American session concentrates on Canada with building permits and Ivey PMI featured. Looking ahead it is a busy central bank week with rate meetings from the RBA, RBNZ, ECB and BOE. While no shift in rates is expected across the board it is perhaps the RBA and ECB meetings that will garner the most attention. Will the RBA acknowledge that recent data has been disappointing and ease off its current mildly restrictive stance? On the other hand, will Mr. Trichet revert back to his hawkish vigilance tone? On a slower data week, central banks will grab the spotlight. Stay tuned.

Source