USD Rebounds in Choppy Trading
On Thursday, trading in the major US cross rates was technical, sometimes even erratic in nature. The overall decline of the dollar halted. Cross currency spill-over effects triggered a repositioning in several individual cross rates. The decline of USD/JPY pushed EUR/JPY below the 2016 low at 120.83. This break caused also a downside reversal in EUR/USD. EUR/USD closed the session at 1.1316 (from 1.1395). USD/JPY regained part of the earlier losses later the session as US equities performed rather well . The pair ended the day at 107.10 (from 106.99 on Wednesday). So, in the end USD resilience was the name of the game rather than anything else.
Overnight, Asian equities trade again in negative territory even as the dollar is in better shape. Japanese equities underperform as USD/JPY struggles to stay above the 107 big figure. Mainland China markets are still closed. The rebound of the dollar also weighs on the commodity complex. AUD/USD is drifting back lower in the 0.74 big figure. Yesterday, the decline of EUR/USD was at least partially driven by the sell-off in EUR/JPY. This morning, it is more outright USD strength that is pushing EUR/USD below the 1.13 barrier.
The eco calendar remains quite thin today with only some national production data in the euro area and the first estimate of US University of Michigan consumer confidence
for June. ECB’s Weidmann, Constancio and Lane are scheduled to speak.
The University of Michigan consumer confidence showed a strong rebound
in May, although the final reading reversed part of the initial uptick.
For June, the consensus is looking for a limited drop, from 94.7 to
94.0.
We believe however that the risks remain for an upward surprise as
stocks markets are again close to the highs and also the weekly
Bloomberg indicator improved recently. A positive US consumer confidence might be slightly supportive for the dollar. However, we think that USD trading will still be driven by technical consideration and global market developments.
Yesterday , the it was not easy to explain the downside reversal in
EUR/USD (see higher). So, the question is which theme will prevail
today. we stay neutral on EUR/USD, as couldn’t identify the
driver behind yesterday’s correction. Or is Brexit uncertainty gradually
becoming a negative factor for EUR/USD, too?
For USD/JPY, we maintain the view that the upside will be difficult as there is still plenty of event risk.
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 postponed a rate hike and triggered a
repositioning lower of the dollar. We expect some consolidation in
EUR/USD, as markets take time to assess the timing of the next Fed rate
hike. Brexit is a wildcard for EUR/USD trading. 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, but 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 weakening, any rebound of USD/JPY should be short-lived.
Sterling looking for new referendum polls
Yesterday, sterling trading showed also a diffuse picture. The UK currency lost moderately ground against the dollar, but rebounded against the euro. As was the case in several other cross rates, technical considerations and cross-currency spill-over effects were at work. Mid-morning, the UK trade balance data were less negative than expected. EUR/GBP declined after the publication of the report. However, the move was probably more due to the decline of EUR/USD rather than a reaction to this volatile UK data series. EUR/GBP drifted south throughout most of the day and closed the session at 0.7827 (from 0.7855). Cable finished the session at 1.4458 (from 1.4504).
Today, only the UK April construction output data
will be published, but it won’t affect sterling trading. Investors will
look out for new polls on the EU referendum and for the political debate
as it develops this weekend. This week, sterling digested mixed
signals. There was not clear directional trend in EUR/GBP, but rising
volatility measures indicate that market stress is still high.
We expect sterling to remain in the defensive as the campaign on
the EU-referendum intensifies. The break above 0.7750 was a first
indication of further deteriorating sterling sentiment. We maintain a
sterling negative bias.
