Market Drivers July 2, 2015

Swedish CB cuts repo rate another 10bp to -35bp surprising market
UK Construction PMI 58.1 vs. 56.6
Nikkei 0.95% Europe 0.02%
Oil $57/bbl
Gold $1164/oz.

Europe and Asia:
AUD Trade Balance -2.75B vs. -2.21B
GBP UK Construction 58.1 vs. 56.6

North America:
USD NFP 08:30

The Swedish central bank unexpectedly cut it repo rate another 10 basis point to -0.35% surprising the market and causing a sell off in high yield currencies on an otherwise uneventful dealing session ahead of the US Non Farm payrolls due later today at 12:30 GMT.

The Riksbank noted that inflation in Sweden was responding the policymakers lax monetary policy but cited the risks of Greek default as the key reason to loosen credit even further in order to avoid the risk associated with such an event.

The move by Riksbank caught the market off guard with most market analysts expecting no change and indicates just how concerned monetary authorities are about the unknown consequences of a possible Greek default and exit from the Eurozone. Both Aussie and kiwi responded in kind as well with kiwi falling to fresh lows at 6670 as traders responded to risk aversion flows and began to factor in further rate cuts from RBNZ.

On the never ending Greek saga front the situation remains at a standstill with the Greek government appearing to ready to proceed with the referendum on Sunday. Eurogroup President Dijsselbloem in statement subtle as a sledgehammer stated that the EG reserves the right to accelerate Greek loans if the payments are not made effectively sending out a threat ahead of the referendum vote.

At this point its unclear if Mr. Dijsselbloem’s comments will create fear or defiance amongst Greek voters and although the most recent polls suggest that a No vote is ahead, no one can confidently predict what will happen on Sunday. The only thing that is certain is that there is now a lot of bad blood between the two parties and negotiations will be challenging even if the vote is Yes. For now Greece is in arrears not in default but should the country vote No and trigger a formal default the cross default clauses amount to 190 billion euros and that is where the contagion risk lies.

Against this backdrop the NFP data today seems almost an afterthought but the markets will no doubt focus on the US data with 200K+ jobs the key barrier to keeping the dollar bulls happy. Generally the pre-NFP data has been mostly positive with ADP hitting 6 year highs, but with ISM Services report coming in next week a key predictor of the NFP is missing this month. In either case, unless the report is wildly off the mark it may have a limited impact on the market, although a strong number could send EUR/USD to a retest of this week’s lows near the 1,0950 level and push USD/JPY through the 124.00 level.

The US economy is clearly performing well and Fed officials appear to be eager to move off the zero bound level, but just as Riskbank authorities tonight they may have to craft their policy to respond to the risks outside of their control and may have to keep rates steady for a while longer even if the NFP data proves to be robust.

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