Updated from March 31 To an unusual extent, currencies are the linchpin on which financial markets will most likely turn in the coming weeks. The keys to foreign exchange rates, in turn, are three major events in coming days: an ECB decision on rates, a big-business sentiment survey in Japan, and the U.S. employment report for March. Any one could have serious ramifications for the greenback; collectively, they almost assuredly will. Forecasting is always dicey, but one potential outcome of the "big three" events features near-term strength in the dollar, probably leading to corresponding strength in equities and weakness in commodity prices. ECB Meet & Greet: The European Central Bank meets Thursday. Dovish comments from ECB officials, including President Jean-Claude Trichet, in the wake of weak German business confidence have raised expectations for a rate cut. Be it by 25 or 50 basis points, a European ease would reduce the current 100-basis-point yield differential between the ECB's key lending rate and the Federal Reserve's fed funds rate. That, in turn, would likely put downward pressure on the euro vs. the dollar, which boasts a stronger domestic economic backdrop. In anticipation of a potential ECB rate cute, the euro has fallen from its Feb. 18 high of $1.2826 to $1.2172 late Tuesday. In recent days, expectations for an ECB rate cut have declined. But at a minimum, Europe's central bankers will "try to keep expectations alive for an eventual rate cut" in their statements, which "would keep the euro under pressure," predicts Ashraf Laidi, chief currency analyst at MG Financial Group. On Thursday, the ECB did leave rates unchanged. More surprisingly, ECB President Trichet downplayed hopes of an ease anytime soon. "On balance, there is currently no evidence challenging the assessment of continued, though modest, real GDP growth over the short term," he said at a news conference. The euro was recently up slightly to $1.2342 vs. $1.2303 late Wednesday, but stronger-than-expected U.S. economic data mitigated the euro's rise. Japan's Tankan Survey: This key sentiment index for big Japanese manufacturers is also due Thursday. A similar survey of small Japanese businesses released Tuesday was stronger than expected, boosting hopes for an upbeat March Tankan survey. If the Tankan survey is strong, traders will most likely rush to buy yen and sell dollars. The greenback has already fallen about 6.5% vs. the yen since early March amid speculation the Bank of Japan will reduce intervention aimed at helping the dollar; overnight Tuesday, the dollar tumbled below 105 yen, its lowest level since June 2000. Thursday's Tankan survey was indeed stronger than expected, rising to its highest level since 1997; recently the dollar was trading at 103.77 yen, down from 104.36 late Wednesday.
The BOJ may reduce its dollar-buying, but demand for foreign assets remains high among Japanese pension funds and other institutions, said David Greenwald, a partner at Newport Beach, Calif.-based Scalene Partners, a currency-focused hedge fund. "The story of April dollar/yen will be huge outflows out of Japan into foreign markets, which is bullish for the dollar," Greenwald forecast. Noting Wednesday is the end of Japan's fiscal year, Greenwald envisioned a scenario where the Tankan data are bullish for yen, but price action doesn't follow through. Such an outcome would "confirm the driver of dollar/yen is asset allocation and not macroeconomics," he said. As noted above, the strong Tankan was indeed prompting a strong yen rally midday Thursday. Friday's Employment Report: This is the third, and perhaps most crucial, event this week for the dollar, and certainly the most important to accompanying movements in equities and Treasuries. As
detailed here , economists have woefully overestimated the pace of employment growth in recent months. For March, consensus estimates are for nonfarm payrolls of 123,000 with the unemployment rate unchanged at 5.6%. Although 123,000 isn't dramatically lower than consensus in recent months, only five of the more than 70 economists surveyed by Bloomberg are forecasting payroll expansion above 150,000, noted Jim Bianco, president of Bianco Research in Chicago. "There's definitely been a downshifting of expectations among the economic community," Bianco said. From a contrarian perspective, that suggests March could be the month when the big payroll payoff finally arrives, he said. A drop in jobless claims benefits reported Thursday further fueled such expectations. A stronger-than-expected employment report would boost the dollar, most certainly vs. the euro, as it would confirm the relative strength of the U.S. economy. The jobless claims data and a stronger-than-expected ISM Manufacturing Survey did help ameliorate some of the sting of the ECB's decision to stand pat. "I can imagine a scenario where the Tankan is better than expected but dollar/yen goes up, the ECB cuts, and U.S. employment is much better than expected, making the dollar much stronger across the board," Greenwald said.