The USD is a safe haven currency and gained after Friday's poor NFP. This week, we are starting with some paring of those gains across the board. What are the event risks ahead that can move sentiments and the USD?
1) As a Safe Haven currency, risk-on and risk-off dynamics directly effect he USD. So any bad headlines about the eurozone crisis or China or even the US economy (like the poor NFP), can buoy the USD (and its rival JPY). During risk on, the USD tends to gain on the JPY, and vice versa.
2) Clues to what the Federal Reserve Bank will do in their next meeting will also be key for the USD. It's not like they can cut rates any lower, so the market is constantly pricing in whether there will be QE. It is in my opinion unlikely, unless we get a string of terrible data. Friday's poor NFP was bad, but not terrible enough to push Bernanke's hand.
Here is a screenshot taken from Forexfactory on some scheduled key event risks this week (click for the full size). I filtered out only the key US economic releases and Chinese data, but European data and any other global economic data that can shape risk-sentiment should be considered event risk to the USD. It is after all, the most traded currency and is at the crossroad of many different dynamics. But let's keep it focused on US and China here:
The notes on China event risks are taken from the EUR - Event Risks article.
Inflation in China has been sliding sharply from the 6.4% reported 7/8/2011 (for June, 2011). The inflation data that just came out today (7/8 in the US), shows continuing disinflation. With PPI showing deflation, China looks to be geared up for further rate easing and monetary stimulus measures.
FOMC Member Williams Spoke and basically reiterated a lot of things said during the June FOMC meeting, when they extended Operation Twist. BUT, he did sound convinced that QE can work if needed, something we didn't really get from Bernanke:
If further action is called for, the most effective tool would be additional purchases of longer-maturity securities, including agency mortgage-backed securities. These purchases have proven effective in lowering borrowing costs and improving financial conditions. - John C. Williams 7/9/2012
Mr. Williams is considered a dove anyway, so no surprise. But still, this keeps the hope for QE alive and the conventional counter-intuitive wisdom that if shit does hit the fan, the Fed will help out with another stimulus injection.
The chart below shows where the members stand. I think by now, Williams is probably at -2.
Trade balance can reveal developments in the economy. Export component will show world demand for Chinese goods. Import component will show internal demand, so it's not just the balance, but the absolute change in export and imports that might be key within this release.
New Loans data might not be the biggest mover, but can also reveal development in Yuan as an up and coming reserve currency.
Trade Balance data for May comes out. We need to break down the export and import component. If both increased, then the resulting trade balance should not matter too much. But if both decreased, even a better trade balance means nothing, and the data would reflect slowing trade activity.
Oil inventories don't usually move the markets, and the 10-yr bond auction has not been on the market's radar neither. However, we recently did break historical lows in the 10-yr bond yield early June at 1.43%. If the auction does indeed cover with yields lower than the previous 1.62%, we have further confirmation of the USD's safe haven demand.
FOMC Meeting Minutes is probably the most watched release this week for the USD. Again, what is the prospect of QE? That is the question the market has been asking.
Jobless Claims data have remained elevated and expected to be so again this past week. This continues to put a damper on risk. A single report on 1 week of data should be the reason for QE expectation, so here bad news should be bad news, and should support the USD (and JPY).
Import Prices in negative territory shows the strength of the USD. Not on the radar. Inflation in general is subdued according to the FOMC, which leaves them room to do QE.
The Federal Budget showed a deficit for in May. Not a key release, but maybe if headlines about the fiscal cliff jumps off the back of this release, we can get risk aversion. This is because the US would be in a recession, bad for stocks, bad for commodities. This might actually support safety assets like bonds, and you already know it: USD.
FOMC member Williams speaks again this week. Unlikely a big surprise factor here after the FOMC minutes, but still worth taking note on his dovishness.
China: (really Friday for China)
GDP Q2 (year-on-year) expected to be 7.9%, after the Q1 (y/y) GDP of 8.1%. This is a key release for China and global growth. Though no where near recessionary numbers, a slowdown of this behemoth means less investments abroad and slowing of global activity.
PPI (producer price index) can help to confirm that inflation is indeed held down, giving the Fed room to operate.
Umich sentiment is expected to be a bit better than the last reading. Which means there is more room for negative surprise just be falling lower. This is because in general the index has been rising since the August 2011 reading of 54.9
Mind these event risks and their impact on risk sentiment and QE. Trade well, trade safe.
Fan Yang CMT is a forex trader, analyst, educator and Chief Technical Strategist for FXTimes - provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.
Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.