Overnight Developments:

• China cuts its benchmark lending and depost rates, its second cut since early June.
• Lowered its one-year yuan deposit rate 25 basis points to 3%, and its one-year lending rate by 31 basis points to 6%.
• The central bank also announced more relaxed rules on lending, allowing bank lending rates to fall to 70% of the benchmark rate, instead of 80%.
• Yesterday Euro-zone retail sales rose 0.6% in May, while today German factory orders rose 0.6% for May, both better than expected (some relief).
• In UK, Halifax HPI up 1%.
• Spain sold 3 billion euros of 10-year bonds at an average yield of 6.43%, compared with 6.044% when the securities were last sold on June 7.
• Australia posting its 5th straight trade deficit.

BOE Re-Starts Bond Buying Program:

• Yesterday, Services PMI showed a drop to 51.3, lower than forecasts (joining manufacturing and construction in underperforming) and likely sealed the deal for the action by the BOE today.
• BOE restarts its bond buying program by adding another £50 bn bringing the total to £375 bn.
• BOE expects this round of QE to take 4 months to complete.
• Earlier, BOE announced a credit-boosting program in an attempt to revive the economy.
• Resumption of bond buying made possible by falling inflation.

ECB Lowers Rates Below 1%:

• ECB cuts rates to 0.75%, bringing interest rate to record low.
• ECB lowers its deposit rate (the amount paid to banks to hold their reserves with the ECB) to 0% from 0.25%, in an attempt to get more money into the economy.
• Lower interest rates should help periphery, but would weaken the interest rate differential of EUR vs rivals.
• Let’s see if there’s any mention of another LTRO or other steps ECB can take beyond bringing rates further down.
• UPDATE: No LTRO hints from Draghi

US Releases This Week:

• Today US posts ISM Services data. If it falters (forecast is 53.1 vs 53.7 in May) then calls for action from Fed will grow.
• We also get a sense of NFP with the release of the ADP employment change and latest jobless claims (which have stabilized at a level in upper 300’s.)
• We are looking for clues as to whether the Fed joins other central banks in adding stimulus.
• UPDATE: The ADP Employment Change and jobless claims data came in better than expected, which could increase the chances of a better than expected reading from NFP tomorrow, and lessen the chances of QE3 from the Fed in the near term. Still, even a positive surprise may be taken as an aberration.

NFP & Fed:

• If NFP comes in substantially below the 90K-95K forecast, then bad news is good news as it means more chance that Fed will act and risk can gain.
• Weakness in manufacturing and in job growth is certainly not good for global growth, so this reaction will be tricky.
• Those playing the macro side will want to offload risk, while those playing monetary policy expectations will want to buy risk. We face this battle often nowadays.
• IF NFP hits status quo, market will keep guessing on QE.
• IF NFP surprises to top side, less chance of QE, though will market be disappointed by that and actually sell off risk as a result?

Theme of This Week:

• The risk rally from EU Summit has extended on the back of central bank policy.
• Commodities have gained boosting commodity linked and risk linked currencies like AUD, NZD, and CAD.
• NFP is key now to gauge the expectation for the Fed and financial markets going forward for the next few weeks.

Nick Nasad is a macro economist, market analyst, and educator; and one of the main contributors to FXTimes.com – provider of  News, Analysis, Education, Videos, Charts, and other trading resources.

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.