Dollar Hammered as Payrolls Disappoint Big
On Friday, the US payrolls was very weak as net job creation slowed to 38 000 in May. Markets priced out the chances for a June rate hike. Bond yields, equities and the dollar nosedived. EUR/USD jumped from the mid 1.11 area to the mid-1.13 area. US equities reversed most of the initial losses, but it didn’t help the dollar. EUR/USD closed the session at 1.1367 from 1.1151. USD/JPY traded just below 109 before payrolls but closed the session at 106.53 (from 108.87 on Thursday ).
Asian equities trade mixed (little changed) this morning. Japanese equities suffer from the sharp rise of the yen. However, the losses are moderate (less than 1% percent) and the yen has stabilized. USD/JPY trades currently again in the 107 area. The declining probability of a Fed rate hike and the weaker dollar support emerging markets and counterbalance the initial post-payrolls risk-off sentiment. The decline of the dollar also supports most commodities and the Aussie dollar. AUD/USD rebounded to the high 0.73 area this morning, but trades currently again around 0.7330. EUR/USD opened near Friday’s closing levels, but the dollar the dollar regained a few ticks.
The eco calendar is empty today, but the focus will be on Yellen’s speech
after the European close. Also ECB’s Nowotny is scheduled to speak.
Yellen of course can’t ignore the disappointing US payrolls report. At the same time, we don’t expect Yellen to make a real U-turn.
She will also take into account the decline of the unemployment rate
and decent wage growth. A June rate hike has become very unlikely, as it
goes completely against the market positioning.
However, Yellen’s comments might be slightly less dovish than markets expects after Friday’s payrolls. The might support a modest upward correction of the dollar. We also look out whether polls indicating a lead for leave in the UK EU referendum will become a factor for global markets, or at least for European markets. Brexit uncertainty might be bad for sentiment on risk in Europe. The impact on EUR/USD is less straightforward. In theory it should be euro negative, but it will also complicate the Fed rate hike intentions. We think that Brexit will be euro negative if it would really become a factor for global/European markets. However, for now, we didn’t reach this point yet. We start the week with a neutral to slightly positive bias for the dollar as we see room for some correction after Friday’s post-payrolls sell-off.
Technically, the dollar rebounded in May on more
hawkish Fed comments/Minutes that opened the door for a possible June
rate hike. Our basic scenario was (and still is) that the US economy is strong enough to allow the Fed to implement two rate hikes this year.
However Friday’s payrolls triggered a repositioning in the dollar. The
beak/test of the EUR/USD 1.1217/1.1144 area is rejected. We assume some
consolidation in EUR/USD as markets will look for other key US eco to
assess the chances of a July rate hike.
Brexit might also become a wildcard for EUR/USD trading. Verbal Japanese interventions and a global USD rally blocked the downside of USD/JPY early May. The pair started a steady rebound. The high 111 area was a strong resistance, bur a real test didn’t occur. The pair was already off the recent highs before the payrolls and the decline accelerated after the release. With the Fed rate hike probability declining and global sentiment potentially weakening, we expect the topside of USD/JPY to remain difficult short-term.
Sterling suffers from rising Brexit tensions
On Friday, sterling EUR/GBP hovered in the 0.7720/40
area against the euro ahead of the publication of the UK services PMI.
Sentiment in the services sector improved more than expected (from 52.5
to 53.5), but sterling hardly gained any ground. After the U-turn in
Brexit sentiment last week, investors stay cautious to react to sterling
supportive news. The awful US payrolls report also left its traces in
on sterling. Cable jumped from the low 1.44 area to the 1.4580 area, but
still underperformed EUR/USD. Cable closed the day at 1.4518 (from
EUR/GBP regained the recent high and closed at 0.7829 (from 0.7732).
During the weekend, two polls even showed a lead of the ‘leave’ camp confirming the trend from last week. The rising uncertainty on Brexit is putting sterling under pressure this morning. EUR/GBP trades currently in the high 0.78 area. Cable dropped to the 1.4375 area. There are no important eco data in the UK today . Brexit-uncertainty will be the key factor for sterling trading. We see risks for further GBP losses. Don’t catch the falling knife. Recent polls showed rising chances for the Brexit camp and raised uncertainty/volatility, weighing on sterling. We expect sterling to remain in the defensive as the campaign on the EU referendum intensifies. The break above 0.7750 is a first indication of further deteriorating sterling sentiment. We maintain a sterling negative bias.