Dollar Higher Ahead Of ECB, BoE, Spain Auction And ISM Services

Dollar and yen continue to recover as markets are awaiting a jam-packed calendar with heavy weight events. ECB and BoE will announce rate decisions today and both are expected to provide additional stimulus to the markets. ECB is expected to cut rates by 25 bps while BoE is expected to expand the asset purchase program by GBP 50b. In addition, Spain and France will hold long-term bond auctions today which will be an important test on markets' response to the EU accord agreed last week. In Greece, prime minister Samaras is set to meet with Troika finance minister Stournaras. And from the US, there will be release of ADP employment and ISM services, which will also have an impact on overall risk sentiments.

The ECB is expected to cut the main refinancing rate by -25 bps to 0.75% and the deposit rate by -15 bps to 0.1% at the July meeting. The forecast has taken into account policymakers’ concerns about taking the deposit to 0% which would inhibit credit creation and increase financial instability. Other than rate cuts, the ECB would probably not add unconventional measures this month.

The Spanish Treasury will sell up to EUR 3b of 3-, 4- and 10-year bonds today. Markets see the 10-year auction in Spain as a "litmus test" after the EUR 100b banking bailout and the EU leaders agreed to allow EFSF and ESM to buy bonds in the secondary markets. The benchmark 10-year yield of Spain was slightly below 6.5% yesterday. France will sell up to EUR 8b of debts due in October 2019, April 2022 and October 2023. Ireland will also try to sell EUR 0.5b of bills due in October. That's the first auction since September 2010 and has symbolic meaning as Ireland finally returns to markets after bailout.

The BOE is almost certain to raise the size of asset purchases by 50B pound 375B pound at the July meeting. The MPC members last month voted 5-4 to maintain the asset purchases unchanged. Those voted against additional easing would like to gauge the impact of the emerging "Funding for Lending," i.e. the Long Term Repo Operation (LTRO), but believed that further easing would be necessary in the future. Inflation in the UK has eased significantly in recent months. Headline CPI moderated to +2.8% y/y in May from +3.0% in April and above +5.0% in late 2011. As the price pressure faded away, this removed a hurdle for policymakers to ease further.

On the data front, US ADP report is expected to show 100k expansion in the private sector jobs in June. Initial jobless claims are expected to be steady at 385k. ISM non-manufacturing is expected to dropped to 53 in June. Note that ISM manufacturing index surprisingly dropped below 50 level to 49.7 in June. That's the first contraction reading since 2009. A single weak ISM manufacturing data won't be strong enough to push the Fed for additional easing. But the story will be different if we're going to have a weak ISM services today and a weak NFP tomorrow.