Wednesday FX Brief: Risk Resumes as Expectations Grow for ECB Reprieve

NEW YORK/LONDON — Manufacturers in the United States, China and Europe struggled last month as demand fell, suggesting an ailing world economy that still needs a steady diet of central bank support. Output at U.S. factories declined in May for the first time in six months, the Institute for Supply Management reported, while China’s massive manufacturing sector shrank for the first time in seven months, adding to concerns that the world’s two largest economies were losing momentum in the second quarter.

The European Central Bank is prepared to cut off funding to Cyprus and let the Mediterranean island succumb to financial meltdown if it has to, confident it has unlimited firepower to protect the rest of the eurozone. Cyprus propelled the 17-nation bloc into uncharted waters on Tuesday by rejecting a proposed levy on bank deposits as a condition of a 10-billion euro (US$12.9-billion) EU bailout. Without the aid, much of it to recapitalize Cypriot banks, the ECB says they will be insolvent, and it requires banks to be solvent for them to receive central bank support.

Andrew Wilkinson submits: Bond prices finally cracked to the downside on Tuesday after almost a week of deliberation following the Fed’s decision to wade deeper into the U.S. debt market. Investors were trapped between two views. The Fed’s presence would depress yields further as they aim to boost lending across the wavering economy.

Andrew Wilkinson submits: Having reached a one-month high midweek against the U.S. dollar, the euro is hovering above $1.4500 in early Thursday trading awaiting the outcome of the monthly ECB meeting. While there is no change to interest rate settings expected, investors eagerly await policy makers’ approach to the progress or plans of the government of Greece in tackling its double-digit budget deficit.

If Friday and yesterday it was Europe's reporting of ugly and below expectation economic data that pushed US stock futures ultimately higher, today it will be Europe's modest economic data beats that will send futures, where else, higher, and result in the Dow Jones breaking its nominal all time highs at the open or shortly thereafter.

Andrew Wilkinson submits: Risk aversion continues to underpin the foundations of a powerful advance sending the dollar index to a 10-week peak as investors unwind positions vulnerable to an avalanche of fear. For investors confident in the global recovery theme, there remain two stumbling blocks. Eurozone sovereign debt fears have been reawakened in the aftermath of an €85 billion bailout for Ireland.

Andrew Wilkinson submits: MGM Mirage, Inc. (MGM) – Bearish investors dominated options activity on the operator of casino resorts today with shares of the underlying stock suffering a 6% decline in value to stand at $15.65 as of 12:15 pm (ET).

Cliff Wachtel submits: The EU Policy Meeting Is The Likely Big Event This Week Either IF It Clearly Shows It Has a Rescue Plan, OR, Clearly Shows It Does Not.The Other Potentially Big Event: If Fed rate decision or statement is surprisingly hawkish, THAT would send the US Dollar higher if there's no decisively positive word on EU debt crisis resolution.Canadian Dollar: Continues to rally after the hawkish BoC statement, February unemployme