Dollar Licks Wounds from Friday’s Damage

<p>The US currency licks its wounds in the aftermath of Friday’s Non-Farm Payrolls disappointment amid re-kindled talk of a QE3 announcement later this week. Euro […]</p>

The US currency licks its wounds in the aftermath of Friday’s Non-Farm Payrolls disappointment amid re-kindled talk of a QE3 announcement later this week.

Euro eases off Friday’s four-month high of $1.2817 after Greece’s coalition failed to reach a deal on the €11.5 billion in spending cuts. The nation’s Democratic Left said no decision had been made on spending cuts and that poorer Greeks must be protected from austerity measures. All three parties in the coalition agreed to meet again on September 12, two days before eurozone finance ministers meet in Cyprus for a briefing on Athens’ progress.

The Japanese yen ignored a substantial downward revision in Japanese Q2 GDP, continuing to trade little changed. The revision took the print from 1.4% to 0.7% quarter-on-quarter and on a annual basis from 0.3% to 0.2%. The revision could increase the chances of further easing (the BOJ meets on 9/19) but the upcoming FOMC decision will be more important for JPY pairs. USD/JPY is currently trading around 78.30.

There is a 60% chance of QE3 this week, according to a Reuters survey. Yet we continue to deem inflation worries (from rising energy prices) as an obstacle to any immediate QE announcement this week. And despite the disappointing Non-Farm Payroll reading, falling unemployment rate, improving services ISM and rising retail sales are among the recent economic data standing against a September QE3.

Instead, the FOMC will likely extend its guidance phrase to read that low interest rates will extend into 2015 from the current 2014. Bernanke will likely reiterate the Fed’s readiness to unload QE3 in the event of future deterioration in conditions. We continue to expect that the markets will avoid any 7%-8% declines off their recent highs upon the realisation that both the ECB and Fed are able to deliver monetary stimuli, instead of only the Fed as was the case over the last two years. The perception that there are two capable firefighters in the global monetary system increases the potential for S&P 500, Dow 30, DAX 30 and FTSE 100 to attempt 1465, 13900, 7700 and 5865 respectively by late Q4.

Read our detailed report on Non-Farm Payrolls report.

The weekly CFTC positioning data showed a shift in CAD as it hit the highest levels of the year.

The euro, pound, Canadian dollar and gold all hit the highest levels of the summer. CAD was boosted by a solid employment report that saw 34K jobs compared to the 10K expected.

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