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Further Dollar Gains Depend on RBA and ECB

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Top Stories

  • Osama Bin Laden killed spurs small dollar rally
  • Aussie takes out 1.10 on hopes of hawkish RBA
  • Nikkei up 1.57%, Europe up 0.54%
  • Oil up $112.50/bbl
  • Gold runs to $1550/oz.

Overnight Eco

  • AUD HPI -0.2% vs. 1.6%
  • CHF Retail Sales -0.2% vs. 1.8% last
  • CHF SVME PMI 58.4 vs. 59.8
  • EZ PMI 58.0 vs. 57.7

Event Risk on Tap

  • CAD Raw Price Materials 2.5% eyed vs. 1.8%
  • USD ISM Manufacturing PMI expected at 59.5

Price Action

  • USD/JPY rises to 81.70 on OBL news
  • AUD/USD runs through 1.10 early but corrects after OBL news
  • GBP/USD weak all night trading down to 1.6640
  • EUR/USD corrects to 1.4800 but better PMI helps stabilize it a bit

Currency markets were shaken out of their holiday torpor today on news that US forces were able to find and kill Osama Bin Laden, spurring a small rally in the dollar as profit taking and risk aversion flows kicked in. The greenback rallied across the board with EUR/USD dropping through the .4800 figure while Aussie which earlier in the session managed to set yet another post float high of 1.10, tumbled below the 1.0950 in the wake of the announcement.

With UK markets closed for May day holiday, price action in early European trade was relatively lackluster. On the economic front the final EZ PMI manufacturing data printed a bit better than expected coming in at 58.0 versus 57.7 eyed but the headline number showed divergence within the region. Both Spain and Italy saw slowdown in activity while German and French producers continued to show expansion. German output rose to 62.0 from 60.9 while the final reading from the French factories rose by nearly two points to 57.4 from 55.4 originally reported.

The continued growth in core Europe bodes well for further rate hikes from the ECB, but the recent slowdown in consumer spending and the uneven pace of growth across the EZ may delay any action by the European monetary authorities for a few months. As we noted earlier, while today's OBL driven rally in the dollar has provided the buck with a much needed reprieve, the unit weakness is ultimately dependent on the divergent monetary policies across the G-10 as the Fed remains accomodative while other central banks continue to tighten.

To that end this week's central bank meeting in Australia, EZ and UK could have a much greater impact on the direction of the greenback than tonight's geo-political events. If central bankers in those countries signal a pause in their tightening policies, the dollar rebound could gain momentum as the week proceeds.

In North America today the key event on tap will be the ISM Manufacturing survey with markets anticipating a slight decline to 59.5 versus 61.2 the period prior. With several regional indices showing a slowdown in activity chances are good that ISM will be lower than last month although unless it is a material decline the impact on trade is likely to be minimal.

As we wrote earlier, with dollar positioning so heavily skewed to the downside (as the latest CFTC report shows largest euro longs in nearly 4 years) the potential for some profit taking remains high as the risk trade is clearly overbought. However, unless the RBA and the ECB assume a more dovish posture in their announcements this week, any retrace in EUR/USD and AUD/USD is likely to be very shallow.

FX Upcoming

Currency GMT EST Release Expected Prior
CAD 12:30 8:30 Raw Materials Price 2.5% 1.8%
USD 14:00 10:00 ISM Manufacturing PMI 59.5 61.2

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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