Dollar Fights Back

Daily Forex Fundamentals | Written by KBC Bank | Jun 08 09 07:30 GMT |

Sunrise Market Commentary Bond markets sell off on better than expected US Payrolls report On Friday, the sell-off on the government bond market continued and shifted towards the short end of the curve, as the slowdown in job losses may indicate that the US recession is coming to an end, which may force central bankers to tighten their extreme loose monetary policy earlier than previously assumed. Dollar fights back A better than expected US payrolls release and market speculation that the Fed might raise rates sooner than anticipated until now caused a sharp rebound in the US dollar. Political uncertainty continues to affect sterling trading The Sunrise Headlines On Friday, US Equities closed the session broadly unchanged as excitement over the better than expected payrolls waned and profit taking kicked in ahead of the weekend. This morning, Japanese shares gain 1%, while other Asian stocks trade mixed. Centre-right parties tightened their grip on Europe in the European Parliament elections that ended on Sunday night with a record low turnout, but most big national governments were spared from embarrassing defeats. On Saturday, a group of pension funds and consumer groups made a last-ditch effort to block the alliance between Chrysler and Fiat and asked the US Supreme Court to put the deal on hold. Growth in Japanese bank lending slowed to a seven-month low in May as firms stopped hoarding cash and obtaining funds via capital markets gets easier. Crude oil ($67.78) retreated from a seven-month high on Friday despite better than expected jobless data. Today, the calendar is thin with only the German factory orders and Belgian unemployment rate. Currencies: Dollar Fights Back EUR/USD On Friday, the US payrolls report was the key factor for trading on almost all markets. Investor sentiment was already quite positive from the start of trading in Europe. EUR/USD temporary moved above the 1.42 mark early in the session but settled in a 1.4150/1.4200 trading range ahead of the publication of the US payrolls report. The payrolls came out much better (far less negative), than expected and this initially triggered to usual Pavlov reaction. Bonds were hammered; stocks and other 'riskier' assets including the euro jumped higher. EUR/USD tested offers in the 1.4265 area immediately after the publication. Of course, it remains quite a strange story to see the dollar losing ground on a much better than expected US economic release. Some investors apparently also came to this conclusion. EUR/USD soon had to return the post-payrolls' gains and the pair even slipped in negative territory. This was no only a story of a scaling back global risk aversion. It is still early days, but if this report would be confirmed by other hard data; it could become a story of the US taking the lead toward an economic recovery. On top of that, the payrolls were not the only issue. Markets were pondering the exit strategy of the central bankers in case this would be the start a better era going forward. In this respect, there were some headlines on the screens last Friday from Fed Lockhart. He suggested that at some point the Fed might maintain its expansionary balance sheet while at the same time already raising the policy rate. This kind of reasoning is quite interesting. If implemented, it would of course have important implications for the yield curve (flattening) but it could also change the course of events for the dollar. It is still highly hypothetical, but such a scenario would be less USD negative. Whatever the reason, the EUR/USD nosedived after the initial spike higher and closed the session at 1.3968, compared to 1.4183 on Thursday evening. Today, eco calendar is light. In the US there are no important data on the agenda. In Europe, the German factor orders are scheduled for release. It will be interesting to see whether this indicator confirms the picture that the worst of the economic downturn might be behind us. EUR/USD: hammered by a better than expected payrolls report Support comes in at 1.3927/25 (reaction low hourly/Break-up hourly), at 1.3895 (Boll Midline), and at 1.3739 (Previous reaction high). Resistance stands at 1.4042 (STMA), at 1.4070 (Previous reaction low), at 1.4113 (MTMA) and at 1.4267 (Friday high). The pair is in neural territory. USD/JPY Over the previous weeks, market sentiment turned dollar negative and the euro took profit from improved global risk appetite. On top of that, there was a lot of uncertainty whether the Fed will raise its program of asset purchases (including Treasuries) and markets grew also more concerned on the fiscal situation in the US. It is still very early, but after last Friday's developments, markets might look at things from a different angle. Until now, the swings in risk appetite were the most dominant factor for trading on almost all markets. After the payrolls, markets might shift their attention to the pace of the recovery in the US and its potential impact on the Fed policy. This might bring the focus to the developments on the interest rate markets. It is a bit too early to say that from now the fate of the dollar will depend on (the rise) in US short-term interest rates. Nevertheless, we wouldn't be surprised to see the dollar gaining ground on good US eco data. In this respect, we will also take a very close look at the signals that will come from the Fed. Do the quotes from Fed's Lockhard (Fed might raise rates sooner than expected) mirror the way of thinking of the majority within the Fed? If the Fed is indeed considering raising rates much sooner than markets anticipated until now, this would make the picture less dollar negative. Until last week we had a euro positive/dollar negative bias. We think that Friday's developments at least warrant some caution for our strategy. So, we change our EUR/USD bias from positive to neutral. There are not many high profile (US) data on the calendar this week, but for example the reaction to the US retail sales (Thursday) could be interesting to see whether markets have indeed adopted a different way of reacting. Looking at the technical charts, the LT outlook remains euro positive as long as the EUR/USD pair stays above 1.3739 (Previous reaction high). However, Friday's forceful correction clearly is a negative for the short-term momentum in this pair. The pair dropped blow the MTMA (today at 1.4044). So, we have the impression that the topside in EUR/USD is becoming more difficult. For now, we expect some consolidation in the 1.3739/1.4338 trading range. A break below this range bottom could be indication that the ST USD sentiment is improving. On Friday, the US payrolls report was also the tipping point for USD/JPY trading. The pair traded in a tight range between 96.50 and 97.00 in the run-up to the report. After the publication of the payrolls and the Lockhard headlines, the pair jumped sharply higher and build out its gains later in the session. The reaction to the payrolls on the stock markets was mixed. However, from a dollar point of view, the prospect that better eco data might lead to an earlier than expected rise in (short-term) US interest rates obviously was a supportive factor for the US currency. USD//JPY closed the session at 98.64, a gain of more than two big figures compared to the 96.58 close on Thursday. Overnight, Asian stock markets showed a mixed picture. Japanese indices outperformed (gains of around 1%, supported by the stronger dollar?). The Japanese current account surplus continued to decline (to JPY 630.5 Bln, from 1485.6 Bln in March). However, as usual the impact on the yen was limited. Global context. Over the previous weeks, USD/JPY developed a sideways trading pattern between 101.40 and 93.86/54 (May low/March low). The 'traditional link' between USD/JPY and the performance of global stock markets/risk appetite was no longer as tight is it used to be some time ago. Global dollar weakness was the name of the game. USD/JPY came close to the key 93.54 range bottom, but a break didn't occur probably as markets fear Japanese (verbal) action in case of additional yen gains. Friday's jump in the dollar also propelled USD/JPY higher in the medium term trading range. Higher short-term US interest rates of course could also be a support for the dollar against the yen. We maintain a buy-on-dips approach in this pair. A break above the 99.74 May high, might open the way fro a retest of the 101.44 range top. USD/JPY jumps higher. Support stands at 98.13 (Broken Boll top), at 97.23/08 (Previous high/STMA), at 96.80 (MTMA) and at 96.04 (LTMA). Resistance comes in at 98.89 (Reaction high), at 99.74(Previous reaction high), at 100.73 (Reaction high) and at 101.44 (Range top). The pair is in overbought territory. EUR/GBP On Friday, EUR/GBP showed again some rather wild swings. Sterling stayed under pressure early in the session, with the political tensions in the UK the most obvious explanation for this move. The pair reached an intraday high around 0.8865. However, sterling already managed to recoup part of the losses during the morning session and the move even accelerated after the US payrolls report as cable outperformed EUR/USD. Most of this move might be technical in nature. Nevertheless, if market would change their assessment on the US economic recovery and on the US policy reaction, this might also have some impact on the position of sterling against the euro as the UK is in a similar position as the US. EUR/GBP closed the session at 0.8740, compared to 0.8768 on Thursday. Today, the UK eco calendar is empty (except for a reverse auction). This morning the focus in the UK will again be on the political scene as PM Brown will face more pressure after a defeat of his Labour Party in the European elections. Recently, we were a bit surprised by the force of the rebound in sterling. In a longterm perspective sterling is probably undervalued against the euro, but we considered it too early to bet on a sustained sterling rebound. We saw the aggressive BoE QE policy (even extended at the previous BoE meeting) as a reason to stay cautious on sterling (for a similar reason we stayed dollar skeptic). We don't see any change in the UK monetary policy assessment, but as we give much weight to the technical charts in our tactical approach, we couldn't do anything else but drawing conclusions as EUR/GBP fell below the key 0.8637 level. This move forced us to leave our longstanding buy-on-dips approach and turn to a more neutral approach vis-à-vis the UK currency. We don't expect a swift and forceful break lower in EUR/GBP. Nevertheless, the (albeit temporary) break below this key support level is an important signal/ confirmation that something is changing in market sentiment towards the UK currency. At the end of last week, the sterling picture was again clouded by the political turmoil. However, this doesn't change the global assessment. For now we keep a neutral, wait and see approach and look out whether the political uncertainty will have a more lasting impact on sterling trading. Short-term we expect some consolidation in the 0.8576/0.9000 range. EUR/GBP: political uncertainty causes nervous sterling trading conditions Support stands at 0.8733 (Reaction low/STMA), at (Reaction low), at 0.8721 (MTMA), at 0.8619/13 (Reaction low hourly/Break-up hourly), 0.8576 (Reaction low) and at 0.8556 (38% retracement). Resistance is seen at 0.8809 (Previous reaction high), at 0.8849 (LTMA), 0.8867/69 (reaction high), at 0.8925 (38% retracement), at 0.8944 (1st target neckline off 0.8799) and at 0.9022 (2nd target neckline off 0.8799). The pair is in neutral territory. News US: Decline in payrolls softens further in May In May, the US payrolls report came out significantly better than expected showing a decline in employment by 345 000, while the consensus was looking for a drop by 520 000. Both the March (-652 000 from -699 000) and April figures (-504 000 from - 539 000) were significantly upwardly revised. All revisions taken into account, the payrolls dropped by 257 000 less than expected. Looking at the details, 225 000 (from 274 000) jobs were lost in the goods-producing sector of which 156 000 (from 154 000) in manufacturing and 120 000 (from 230 000) in the service providing sector. Government payrolls dropped by 7 000 in May. The civilian labour force rose from 154.73 million to 155.08 million, while the number of people unemployed increased from 13.72M to 14.51M. The unemployment rate rose from 8.9% to 9.4% in May, while an outcome of 9.2% was expected. Also the temporary help agencies, that often lead overall payrolls changes, showed some improvement (-7 000 from -55 000). Education and health (44 000 from 13 000) and leisure, hospitality (3 000 from -38 000) were the only sectors that added jobs. Average weekly hours worked dropped slightly (33.1 from 33.2) and the aggregate hours worked index declined from 100.4 to 99.7. This outcome confirms that the sharp decline in employment is slowing and also the development in temporary help agencies indicates that the worst of the recession might be behind us. Other: UK input PPI shows biggest drop since 2001 In the UK, PPI data came out very close to expectations in May. Output PPI rose by 0.4% M/M to an annual figure of -0.3% Y/Y, which is significantly below the April outcome of 1.3% Y/Y. Core PPI dropped from an upwardly revised 2.5% Y/Y to 1.2% Y/Y. Input PPI came out somewhat lower than expected at an annual -9.4% Y/Y (from -5.8% Y/Y), the biggest yearly drop in PPI since 2001. Download entire Sunrise Market Commentary Disclaimer: This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.