Summary: FX was little changed while global bond yields slipped further. US Payrolls day. Lack of first-tier data and the US Independence Day holiday made for subdued trade. Treasury prices rallied this week on expectations of further monetary policy easing from major central banks. US bond yields slid the furthest, global peers followed. The impact on foreign exchange markets was minimal and currency volatility remained low. Germany’s 10-year Bund yield slipped to -0.40% from -0.39%, all time lows.
The Euro was modestly up at 1.1285 from 1.1280, despite a fall in Eurozone retail sales. The Australian Dollar steadied at 0.7025 (0.7032) despite a slightly lower than expected May retail sales report. Japan’s Yen kept its overall gains, ending slightly higher against the US Dollar at 107.79 (107.85). Trade war concerns lingered after Chinese Ministry of Commerce spokesman Gao Feng insisted the US remove all tariffs as part of the deal struck at the G20 meeting.
Australia’s May Retail Sales missed forecasts at 0.1% against 0.2% although this bettered April’s -0.1%. Swiss CPI bettered expectations. Germany’s retail sales slumped to -0.3% although the previous month’s sales were revised up.
- USD/JPY – The haven associated Yen outperformed, keeping most of it’s gains versus the Greenback. The sharp fall in US bond yields this week kept USD/JPY under pressure. Falling expectations of a speedy resolution to the US-China trade conflict also dented sentiment toward the Greenback. USD/JPY closed at 107.79 from 107.85 yesterday.
- AUD/USD – The Aussie Battler touched fresh two-month highs at 0.70478 yesterday despite the lower-than-forecast retail sales, closing at 0.7025. A less than dovish sounding RBA and short market positioning has underpinned the Aussie.
- EUR/USD – Despite the drop in German 10-year Bund yields to all-time lows and weaker-than-forecast Euro area retail sales, the Euro ended slightly up at 1.1285 (1.1277). The data is second tier while US rates have fallen from higher and quicker than Euro area yields.
On the Lookout: Friday, US Payrolls day. Possibly a game changer. June’s Non-Farms Employment report is critical for the upcoming Fed rate cut. The extremely low number in May and downward revisions for both April and March saw a sharp slide in US bond yields.
June Payrolls are forecast at a median +162,000 from May’s +75,000. Wage growth also weakened to 0.2%. A climb to 0.3% is expected for June.
Other data releases today include Australia’s AIG Construction Index and Japan’s Household Spending and Leading Indicators for Asia. Europe kicks off with German Factory Orders, French Trade Balance, and UK Halifax House Price Index (June). Canada reports its Employment Change, Unemployment Rate, and Ivey PMI. The US NFP Employment Change, Average Hourly Earnings (Wages), Unemployment Rate and the Federal Reserve’s Monetary Policy Report round up today’s data.
Trading Perspective: Most of the US will be out for a long weekend, celebrating their fourth of July holiday. US banks will be manned by more junior traders who won’t want to take any big positions. Trading conditions will be thinner. Less participants means less liquidity. Here’s what to look for:
Payrolls – The extremely low May Payrolls number of +75,000 is expected to be offset by a rise in June to +162,000. Which is in keeping with the average Jobs creation of 100,000 this year. If Payrolls come in at +135,000 or less, the Dollar will slide. Any number under +100,000 could be sayonara for the Greenback.
If Payrolls come exactly as expected, around +165,000, the Dollar will steady at current levels. And markets will look at Wages and revisions.
A gain of +185,000 to +225,000 will see a higher Dollar immediately. Watch for revisions to previous months. Last month both March and April Payrolls were revised lower.
Wages – Are forecast to climb to +0.3% from +0.2%. if wages stay stuck at 0.2%, the Dollar will struggle to gain, unless we see a fantastic Payrolls.
Unemployment Rate: The US Jobless rate is forecast flat at 3.6%. Any changes here could see exaggerated moves.
Market positioning saw a large reduction of USD long bets, most of them against the Euro and Yen.
Sterling shorts increased. Aussie Dollar short bets were much the same.
- USD/JPY – The Dollar Yen could be the biggest mover if we see weaker US Payrolls. The combination of lower US 10-year yields and the current China-US trade conflict will keep USD/JPY under pressure. USD/JPY has immediate support at 107.50 followed by 107.20 and 106.80. Immediate resistance can be found at 108.00 and 108.40. A weak Payrolls number could see USD/JPY slump to 106.80. A good number (+185-+200K) will see a test of 108.50, possibly 109.00 before settling. Will look to trade the extremes. Preference is to sell rallies.
- AUD/USD – Much of the Aussie’s up move has been shorts scrambling for cover. Sentiment was extremely bearish into the RBA’s second rate cut decision. When RBA Governor Philip Lowe expressed less than dovish sentiments, the Aussie started to climb. It comes down to the US Payrolls today. A good Payrolls report (+185,000 or higher) will see AUD/USD test 0.7000 and perhaps 0.6980 before settling. A weak NFP of +150,000 or less would see the Aussie trade up to 0.7100. AUD/USD has immediate resistance at 0.7050 followed by 0.7080. Immediate support lies at 0.7000 followed by 0.6970. Prefer to trade the extremes here too, the preference is to buy dips.
- EUR/USD – The Euro remained stuck in its range, hardly moved at 1.1285. Euro-area (Germany and France) bond yields fell to all-time lows. New ECB Chief Christine Lagarde is widely considered a dove after praising the central bank’s accommodation. The focus is now on the US economy and the Dollar. US bond yields have fallen from higher and harder than its European counterparts. A good Payrolls of +185,000 or more would see the Euro break 1.1260 immediate support to 1.1220 and 1.1200. The next support level lies at 1.1170. A weak NFP print of +135,000 or less will see EUR/USD climb to 1.1350 and 1.1380. Look to go on either side of an extreme trade. Neutral on the Euro, trade the range shag.
Happy Friday, happy Payrolls, happy trading all.