Should we get a firm US payrolls report as implied by yesterday’s GDP data, I suspect the reaction will be less typical “risk-on/risk-off” and more “good news is good news”.
Why the shift?
The dramatic breakout in US interest rates and the slightly hawkish tone from yesterday’s FOMC minutes. If the employment report, now an explicit benchmark for the Fed, continues to improve, expectations for unlimited QE will be dialed back. With some on the committee already pushing for a 2013 expiration date for QE, good data will lead to firmer yields and firmer yields should benefit the dollar across the board, at least in the near-term.
Conversely, if we get weak data, the market will go back to its “QE Infinity” mindset. leading to a weaker dollar versus the likes of the euro, Aussie and CAD.
