ADP and Yellen On Tap Today

The foreign exchange participants are largely marking time ahead of tomorrow ECB meeting and US jobs report. Sweden's Riksbank expected to deliver a 25 bp rate cut then too.

Still, there is no keeping sterling down. The new high in the Nationwide house price index and a stronger than expected construction PMI have helped sterling extend its gains against both the dollar and euro.

Sterling tested the $1.70 level on Monday and, with the help of today's data, pushed closer to $1.7180. For its part, the euro has slipped below last month's low and is now at its lowest level since September 2012.

The construction PMI rose to a 4-month high of 62.6. The consensus had expected a small decline from the 60.0 reading in May. Although the sector is the smallest of the three (manufacturing, services and construction) that the series covers, the employment sub-index is at a record high. Today's report follows on the heels of the stronger than expected manufacturing PMI (57.5 vs. 57.0 in May).

The UK economy appears to be going from strength to strength.. The US recovering from the dismal first quarter. The euro zone may be slightly expanding, but it has lost momentum. The retail sales tax hike appears to have jammed the breaks on the Japanese economy.

There will be two features in the North American session today. First is the ADP private sector employment estimate, which has stolen much of the thunder from the official monthly job report. Here is why: Over the past 12 months, the ADP estimate has average 195.6k a month. The government's estimate has averaged 197k. It is true that over shorter periods, a large gap opens. Over the past three months, the ADP estimate has averaged 197.6k while the government's estimate has averaged 229k. The Bloomberg consensus calls for a 205k in the June estimate from ADP, which would be the second highest in the past seven months.

Second, Fed Chair Yellen will deliver a speech at the IMF. It will be scrutinized (on vain?) for clues into US policy, which seems quite clear at the moment. The tapering continues and will be finished in early Q4. This will likely be followed by a rate hike in 2015. The issue that Yellen is expected to address is financial stability. This is important. Although it is commonplace to speak of the Fed's dual mandate, there are really three: full employment, price stability and financial stability. It is very revealing that the third is often forgotten.

One of the chief criticisms of QE was that it was inflationary. However, the more potent criticism is that is threatens financial stability. The Fed's leadership generally played down the signs of excess in risk taking, but it appears to remain sensitive to the criticism and is aware of the trade-offs between absorbing slack in the labor market, arresting the (previous) deflationary forces, and encouraging what Yellen has called the reach for yield. We expect Yellen to discuss the issue in general. This is not the forum to expect any major revelation.

The Australian dollar is the weakest of the major currencies today. It was pushed off the $0.9500 area in response to a large trade blow out. The May deficit was reported at A$1.91 bln, more than 10x larger than the A$120 mln shortfall expected. Exports slumped 5%, while imports rose 1%.

The reach for yield has helped underpin the Australian dollar, much to the frustration of local officials. And even now the Aussie remains firm, even off yesterday’s high. The Aussie is trading now near the previous high for the year near $0.9460. Support is seen near $0.9440.

For its part, the euro’s brief and shallow move above $1.3700 yesterday, seemed to have exhausted the demand. A consolidative tone has emerged. Initial support is pegged near $1.3650. French developments—that the government wants more action from the ECB is hardly news, and that former Prime Minister Sarkozy has been formally charged with “influence peddling” has not impacted the market. Sarkozy’s predicament may have implications for French politics and the ability of the UMP (center-right) to counter the rise of Le Pen and take advantage of the poor (disastrous?) performance of the Socialists.

Lastly, the dollar has been confined to about a quarter of a yen range against the Japanese unit. The softness of US yields continue to deny the greenback much traction and stalled the greenback just ahead of its 200-day moving average (~JPY101.75) A break of JPY101.40 could see a test on the recent base near JPY101.25.