Market Brief
Risk appetite disappeared in the Asian session ahead of the critical US payroll report. Today's read should provide potential indication for the position of the US in its growth cycle. Asian regional equity markets were weaker as the Shanghai Composite and Hang Seng index fell -1.94% and -1.31%. ASX was in the green, rising 0.23% as the RBA statement of monetary policy signaled that the bank is likely to ease next month. USD was broadly strong against G10 and commodity linked currencies. EUR/USD traded in a choppy tight range between 1.1390 and 1.1410 with no directional indication. As news of the RBA report hit the wires AUD/USD collapsed from 0.7470 to 0.7385. With markets only pricing in a 10% probability of a Fed rate hike in June current downside in USD feels stretched. In Japan, April Services Sector PMI dropped to 48.9, the weakest read in two years from 49.9 in March. Plenty of chatter from Fed members provided entertainment for traders. Fed’s Kaplan suggested that the Fed was still struggling to understand how close the US was to full unemployment. Fed’s Lockhart said it is not realistic to shift from the current 2% inflation target, while Fed’s Williams commented that he is optimistic about their 2% inflation goal. And finally, Fed’s Bullard steered clear of comment direction regarding monetary policy, instead stating that last year’s “taper tantrum” induced volatility was due to ineffective monetary policy. All solid headlines, but nothing in terms of new insight or market moving.
The RBA’s Statement of Monetary Policy indicates that the bank was prepared to ease policy further. The RBA has revised its inflation forecasts lower by 1pp for the end of 2016. This means that inflation will scrape near the bottom of the RBA 2-3% target band. Our view is that June and August will be both live meetings for the potential of 50bp being removed from the already historically low cash rate 1.75% by summer’s end. We remain bearish on the AUD in light of further downside risk to interest rates and would materialise our view through a short AUD/JPY trade (targeting 77.59 reaction low).
In the European session, traders will be watching Spanish industrial production figures, German construction PMI and Poland central bank rate discussions. However the main event will undoubtedly be the US payroll report. FX volatility is likely to remain subdued until the critical release. Payroll growth is expected to decelerate to 200k consensus from 215k prior read, however given the ADP and ISM labor complaint we anticipate noteworthy downside risks. We forecast a number closer to 180k, which should keep the overly short USD position safe. However, an upside surprise in NFP will have an asymmetrical response in USD as traders will quickly need to recalculate the probability of a rate hike in June. Falling participation rates should push the unemployment rate to 4.8%. We expect that the cyclical slowdown seen in incoming economic data, driven by weak international conditions, will begin to play into the strong US labor markets. While USD shorts are heavy we see no sustainable fundamental rationale for holding USD currently. When the smoke clears from today's payroll read we expect EUR/USD bullish momentum will reengage heading back towards the 1.1616 resistance.
Currency Tech
EUR/USD
R 2: 1.1714
R 1: 1.1465
CURRENT: 1.1396
S 1: 1.1217
S 2: 1.1144
GBP/USD
R 2: 1.4959
R 1: 1.4668
CURRENT: 1.4643
S 1: 1.4300
S 2: 1.4132
USD/JPY
R 2: 112.68
R 1: 111.91
CURRENT: 106.94
S 1: 105.23
S 2: 100.78
USD/CHF
R 2: 1.0093
R 1: 0.9913
CURRENT: 0.9621
S 1: 0.9476
S 2: 0.9259