There are three key event risks to monitor this week. On Thursday, the G-20 meet and the ECB monetary policy decision will be announced. Friday, US nonfarm payrolls are due for release. The key focus for the G-20 meeting is twofold. The trade will be looking to see whether the G- 20 can come up with a coordinated plan to support the global financial system and economy. The trade will also be looking to see if there is any new dialogue at the G-20 about replacing the USD as world’s reserve currency. Press reports suggest that the G-20 will pledge to restore growth and create jobs. According to the draft G-20 communiqué, the G- 20 will pledge fiscal banking support aimed at enabling the world economy to expand by the end of 2010. At this time it does not seem realistic for the G-20 to seriously press for abandoning the USD as the global reserve currency.
Abandoning the USD as the world reserve currency during this time of economic and financial crisis would be too destabilizing for the global economy. A majority of the world's global transactions take place in USD and this makes it impractical to consider replacing the USD as a world reserve currency at this time.
The ECB is expected to cut interest rates 50 basis points to 1%. The ECB is under pressure to consider more aggressive measures to try to boost EU growth and join other industrialized nation’s central banks in expanding the money supply. ECB officials have been reluctant to adopt quantitative ease and the trade will be looking closely to see if that reluctance has diminished in any way. EUR remains vulnerable to ECB rate cut speculation.
US nonfarm payrolls for March is expected to rise to -660 K. A rise of 660 K would mean that over 5 Million jobs have been lost in the US since the start of the recession in 2007. A weak US jobs report may further dampen optimism about US economic recovery. How the USD responds to the nonfarm payroll report will primarily be determined by risk sentiment and the direction of equities.
A worse than expected NFP rise could further dent optimism about US global economic recovery and the report may hurt risk appetite. There is a possibility that another weak nonfarm payroll report could start to dampen the USD safe haven attraction. The USD may see modest selling pressure if the G-20 can deliver a credible plan to boost global growth. USD downside should be limited by ECB rate cut speculation and concern that US nonfarm payroll report will discourage demand for equity markets and spark safe haven flows to the USD.