Summary: The US Dollar, stocks and bond yields gained after the US and Mexico reached a deal on immigration and trade to avoid tariffs. Mexico agreed to measures to stem the flow of Central American migrants to the US border, averting a 5% import duty on all Mexican imports, threatened by President Trump. Friday’s dismal US Payrolls report saw the Dollar Index (USD/DXY) slump to 96.459, and the 10-year bond yield to 2.08%. The Mexican news boosted Wall Street, US bond yields and the Greenback. Ten-year US yields climbed 7 basis points to 2.15%. The Dollar Index (USD/DXY) rallied to 96.791. A report from Reuters citing sources familiar with ECB policies said the ECB was “open” to cutting interest rates should economic growth slow. The Euro slipped to close at 1.1311 from 1.1330 on Monday. Sterling slumped to 1.2685 (1.2735 Monday) after data in April revealed the British economy slowed sharply. The Australian weakened to 0.6960 (0.7000) despite better than expected Chinese trade data released yesterday. China’s April trade surplus soared to CNY 279 billion (against forecast CNY 136 billion). The surplus though was the result of a sharp drop in Chinese imports. The Dollar was up 0.30% against the Yen to 108.50 from 108.22.
The relief rally lifted the DOW 0.35% to 26,098 (from 25,995) for its sixth straight daily gain. The S&P 500 rose 0.57% to 2,890. (2,875 Monday).
UK Manufacturing Production, Construction Output and Industrial Production underwhelmed, missing forecasts. UK GDP in April fell to -0.4% against a forecast -0.1%.
- EUR/USD – The Euro slipped back after racing above 1.1300 resistance level to open at 1.1330 yesterday. Reports that ECB policymakers are considering cutting rates pushed the Single currency back down. Which outweighed concerns of an US interest rate cut following the dismal US payrolls report. European markets were mostly closed yesterday due to Whit Monday holiday.
- AUD/USD – slip-sliding away. The Aussie slipped back from 0.7000 cents to 0.6960 weighed by overall US Dollar strength. The climb in US bond yields hurt the Aussie. Australian markets were closed yesterday in observance of the Queen’s birthday.
- USD/JPY – The Dollar ended 0.3% higher against the Yen to 108.50. Higher US ten-year yields boosted USD/JPY.
- GBP/USD – dismal UK economic data for April weighed on the Pound which had rallied against the broadly weaker US Dollar on Monday. GBP/USD dropped top 1.2685. Meantime, Britain awaits the outcome of the Conservative Leadership contest to succeed PM May.
On the Lookout: Last night’s rally in the US Dollar, stocks and bond yields had all the makings of a relief rally. Friday’s dismal US Payrolls report was significantly lower than expected and as Kathy Lien, currency strategist from BK Asset Management in NY correctly observed, the “US economy is slowing”. Expect more to come with this week’s CPI and Retail Sales data.
US bond yields bounced off their lows with the 10-year rising to 2.15% from 2.08%. Expect any further bounces limited to 2.20-2.25%. Jerome Powell and other Fed policy makers have opened the door for interest rate cuts. And while other rival economies are contemplating rate cuts, the US has room for more. Today sees New Zealand Manufacturing Sales (Q1), Japanese Preliminary Machine Tool Orders, Eurozone Sentix Investor Confidence Index, UK Average Earnings Index, Claimant Count Change and Unemployment Rate (May), and US Headline and Core PPI reports.
Trading Perspective: The markets overbought US Dollar positioning has only begun to correct. Expect more to come. In the latest Commitment of Traders/CFTC report, net long US Dollar positioning was trimmed to +USD 89,900 contracts (week ended 04 June) from +USD 92,400. That’s a relatively small reduction. Once again, it’s the breakdown of the currencies that bear watching.
- EUR/USD – The Euro traded to a high at 1.13477 on Friday night following the release of the US Employment report. EUR/USD slid to close at 1.1312 after trading to an overnight low of 1.1290. Immediate support for the multi-currency lies at 1.1290 followed by 1.1260. Immediate resistance can be found at 1.1330 and 1.1360. The latest COT/CFTC report saw speculative Euro short bets trimmed further to -EUR 87,600 contracts (week ended 4 June) from -EUR 92,400. German 10-year bond yields are at -0.22%, up from -0.26% Friday. Look for a likely range today in the Euro of 1.1290-1.1340. Prefer to buy dips
- AUD/USD – The Aussie slipped back through 0.70 cents after trading to a high of 0.7022 on Friday night. The Battler struggled to move higher yesterday despite the strong Chinese trade surplus report. Which was due to a sharp drop in imports, not helpful to the Battler. The China-US trade outlook still appears bleak. The big test for the Aussie will be Thursday’s Jobs report. The latest CFTC report saw Aussie short bets trimmed to -AUD 63,300 from the previous week’s -AUD 66,400. The total is still at multi-year highs. Look to buy Aussie with a likely range today of 0.6950-0.7010.
- USD/JPY – the Dollar rallied against the Yen with a more positive market risk sentiment and higher US 10-yaer yields. USD/JPY fell to a low of 107.88 on Friday before bouncing to close at 108.20 yesterday. The Dollar climbed to 108.715 before easing at the close to 108.50. USD/JPY has immediate resistance at 108.70 followed by 109.00 Immediate support can be found at 108.30 (overnight low 108.322) and 108.00. Look to sell rallies with a likely range today of 108.20-70.
Have a good week ahead all, happy trading.