The US Dollar looks to comments from the St. Louis Fed’s Bullard for QE3 taper guidance. The Australian Dollar hits 20-month low on soft Chinese economic data.

Talking Points

US Dollar Gains as Asian Markets Respond to Last Week’s NFP Report
Australian Dollar Hits 20-Month Low vs. USD on Chinese Economic Data
Yen Under Pressure as Japanese Stocks Lead Recovery in Risk Appetite
Fed-Speak in Focus as Markets Continue to Look for Fed QE3 Taper Clues

The US Dollar outperformed to start the trading week, rising against all of its major counterparts, as Asian markets responded to last week’s slightly better-than-expected US employment report. When the report initially crossed the wires on Friday, traders that feared an upside surprise might hasten the Fed’s hand cheered on the result, with a swell in risk appetite pulling Treasury yields higher and offering support to the greenback. Overnight performance appears to reflect follow-through on the same dynamic, with Japanese shares leading regional bourses higher. This in turn put pressure on the anti-risk Yen.

It was the Australian Dollar that bore the brunt of USD gains however in the wake of ominous Chinese economic data released over the weekend. Beijing reported that exports grew just 1 percent year-on-year in May, marking the smallest increase in 10 months. Separately, Industrial production growth unexpectedly slowed and new Yuan loans tumbled to a three-month low. Investors projected signs of slowdown in the Chinese economy onto Australia – which counts on the East Asian giant as its largest trading partner – and took them to argue for a greater chance of an RBA interest rate cut at the July policy meeting. The probability of a 25bps reduction is now priced-in at 53 percent according to data from Credit Suisse.

Looking ahead, a lackluster economic calendar in European hours and an empty one in the US session leave little in the way of continuation of established momentum. Stock index futures are sending mixed signals in late Asian hours however. Contracts tracking top European benchmarks are under pressure ahead of the opening bell while S&P 500 futures are pointing meaningfully higher. Fed-speak may ultimately tip the scales and yield near-term direction cues as James Bullard, President of the US central bank’s St. Louis branch, takes to the wires. Mr. Bullard is a voting member of the FOMC and traders will want to see if his remarks offer any guidance on a possible reduction in the size of QE3 asset purchases of the coming meetings of the policy-setting committee.

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