Historically, the first full trading day after a U.S. jobs release tends to be the quietest day of the month. Let’s hope that this morning’s forex moves are a good omen despite having to compete with a month of football (aka soccer) starting on Thursday.
In positional terms, the market has been relatively neutral post-European Central Bank (ECB) announcement late last week. That’s the reason the single currency has found it difficult to find traction in either direction. However, it seems the tides are turning due to the speculator wanting to create more waves as they test some interesting price levels. Many had hoped to sell a EUR rally, but with little bounce yesterday or in Asia’s overnight session, investors will instead have to be content to sell this morning’s technical break.
Both forex volume and volatility have taken a massive hit since the onslaught of low interest rate policies by Group of Seven central banks. What the forex market needs, and has been looking for, is a divergence in monetary policy. The ECB’s policy action last week means that over the next year there will be some divergent monetary policy between the eurozone, the U.S., and the U.K. The lack of market volatility is an ally for the carry trade. ECB easing measures further promote using the EUR as a vehicle to funding so-called trades. The likelihood that the ECB was not going to be aggressive enough would have squeezed some of the more popular of these trades. Nevertheless, committing to throw the whole tool bag at European Union (EU) deflation worries and growth concerns is further supporting the hunt for carry trades. Currencies like the KRW and TRY are the emerging market’s outperformers, while AUD looks to be the contender for the Group of 10 title.
U.K. Manufacturing Output Rises
This morning’s European session has been dominated by leveraged account selling and has managed to trigger some key levels in the EUR outright (€1.3575) and on the crosses. With periphery yields backing up for the first time in four sessions it is providing further incentive. The outright 200-DMA at €1.3650 continues to act as resistance and is holding firm. In EUR/JPY, pressure is on the 200-DMA at €138.70 and a move below here opens the gateway toward €136.20. A change in EUR/CHF below €1.2220 targets last May’s low of €1.2113, while EUR/GBP is now trading at a fresh 18-month low (€0.8065), under pressure from outright selling and stronger U.K. production numbers. With a fresh three-day print under its belt, technically there is no further support for the EUR now until the post-ECB four-month low of €1.3503 seen last Thursday.
The EUR has been in high demand to ‘fund’ buying of peripheral eurozone debt as investors hunt for yield. Do not be surprised to see investors beginning to be squeezed as peripheral banks buy their own sovereign debt, using the funding of cheap liquidity provided by last week’s ECB ease. There is even a suggestion that EU banks with U.S. operations may want to convert EURs to earn the reserve interest rate differentials – further undermining the EUR’s strength. However, the main flows are speculators as outright short-EUR positions have been negligible after the post-ECB squeeze.
In the U.K., British factory output was stronger-than-expected in April (+0.4%, month-over-month, and +4.4%, year-over-year) and added proof that the economy is spreading beyond consumer spending. Its outlook for the U.K. economy is one the International Monetary Fund got wrong, which it admitted over the weekend. This morning’s gains in the U.K.’s industrial sector would suggest a healthy start for the second quarter and will certainly be welcome news for Bank of England Governor Mark Carney and the British government. Both parties continue to express the need for the manufacture and export of goods to increase in order to ensure the sustainability of the U.K.’s economic recovery. Sterling outright caught a natural bid, however, the failing EUR has managed to push the GBP needle after testing its 18-month lows in the European session. The market should expect negative EUR momentum to further support the pound’s cause.
Employment Picture Muddies Down Under
Elsewhere, the latest consumer-price index (CPI) data out of China have further diminished the prospects for a broader and bolder system-wide liquidity injection. Last night’s price release is working to lessen some market concerns over deflation that followed April’s +1.8% print (the lowest since October, 2012). May’s CPI hit a four-month high of +2.5% (expectations of +2.4%), as the food CPI component spiked by +4.1% (fruit rose a massive +20%). The non-food CPI component was up a relatively tame +1.7%, year-over-year, and in-line with expectations. Also in the overnight session, the People’s Bank of China announced a targeted reserve requirement ratio cut of -50bps for certain qualified entities, covering +65% of urban banks and +80% of rural banks. Chinese policymakers have also warned that the direction of their monetary policy has not changed, and that the bank would maintain a prudent policy approach.
It’s worth noting that the widely-watched ANZ jobs advertisements survey Down Under has slumped for the first time in five months. Moreover, it was the biggest decline in three years (job ads fell 5.6% in May). This does not necessarily bode well for the release of Australia’s official employment data on Wednesday (+10.3k expected). Meanwhile, the National Australia Bank’s business confidence survey surprisingly held up, helping briefly lift the AUD/USD pair above $0.9360. From a carry perspective, the AUD is looking to be the G-10 darling, supported by foreigner’s demand for Aussie AAA grade paper. The AUD remains well supported on pullbacks with some analysts looking for AUD/USD parity by year-end.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.