Most of the major currencies are trading higher against the U.S.
dollar this morning which suggests that investors have finally
reached their pain threshold. Unfortunately the persistent gains in
the Japanese Yen indicates that some investors remain risk averse
and they have good reasons to be because outside of a much needed
relief rally and pullback in European bond yields, there is nothing
to support the recovery in the euro and other high beta currencies.
Perhaps this is the reason why the rallies have been so modest.
There is no question that the decline in 10 year Spanish bond
yields is encouraging. If yields continued to rise towards 7
percent, we would be in big trouble this morning with all of the
major currencies trading much lower. At the start of the Asian
trading session, the EUR/USD fell to a fresh 22 month low while
USD/CHF climbed to a fresh 17 month high. Since then the EUR/USD
recovered significantly but is struggling to hold onto its
The state of the U.S. labor market is in focus with the release
of a number of leading indicators for Friday's non-farm payrolls
report. Two of the three reports point to weakness in the labor
market but given the low level of jobless claims in May compared to
April, we are still looking for non-farm payrolls to rise.
According to Challenger Grey & Christmas, layoffs increased to
66.7 percent year over year from 11.2 percent. Strains in the
financial markets and the global economy pushed planned layoffs to
an 8 month high. Private sector payroll provider ADP reported an
increase of 133k workers on U.S. payrolls last month compared to
113k in April. While ADP does not have the best record of tracking
NFPs, it has been relatively reliable directionally. Jobless claims
ticked up to 383k from 373k which is discouraging but if we look at
the month as a whole, claims are still lower in May compared to
April. U.S. GDP growth was revised down to 1.9 from 2.2 percent in
the first quarter. This was in line with expectations but the mix
of revisions were a tad surprising because personal consumption was
revised lower while the price index was revised higher. In other
words, consumer demand was slightly weaker than expected while
inflationary pressures were slightly stronger.
The big event risk this afternoon will be Ireland's referendum on
the EU fiscal pact. If Ireland rejects the pact, they will not be
able to access ESM funding. The results should be released shortly
after the polls close at 5pm ET or 21 GMT.