Dollar Soared As NFP Support Fed's Tapering, European Majors Tumble

The dollar soared last week with help from dovish ECB and BoE meetings and a solid employment report. Dollar index's acceleration on Friday and the breach 84.50 resistance, making new 2013 high, carried bullish implications. The strength of dollar was accompanied by stocks and treasury yields. 10 year yield finished recent consolidations and resumed the medium term up trend to close at 2.715%. The 30 year yield also resumed the larger up trend to close at 3.677%. Both were highest weekly close since 2011. The DOW closed back above 15000 level at 15135.84 and raised the odds of long term up trend resumption.

In the currency markets, the dollar's strength was overwhelming and closed higher against all other major currencies. European majors and yen were the weakest. The GBP/USD was the weakest, and dropped through the 1.5 psychological level while the EUR/USD also moved away from 1.3 psychological level. Both are set to resume medium term down trend from 1.6380 and 1.3710 respectively. Among European majors, the Sterling was the weakest one with the the EUR/GBP finally having an upside breakout. Commodity currencies were also weak, but momentum was overshadowed by European majors. Yen crosses were mixed, with the USD/JPY jumping higher. The EUR/JPY and GBP/JPY reversed after initial strength.

Our strategy of long USD/CAD, short EUR/USD and short GBP/USD were correct last week. We're a bit concerned with the momentum in commodity currencies and thus, we'd prefer to close out USD/CAD long above 1.0656. EUR/USD and GBP/USD shorts would be maintained. Further than that, in case of recovery in both pairs, we'd attempt to add to the short positions. Yen crosses would be avoided.

To recap some important events, the highly anticipated US non-farm payroll report showed 195k growth in June comparing to expectation of of 162k. The prior month's figure was also revised higher from 175k to 195k. Unemployment rate was unchanged at 7.6%. The combined job growth in Q2, at 589k, was very solid. While the unemployment rate was still far above the threshold of 6.5%, it's expected that the Fed will start tapering the 85b asset purchase later this year, probably at the September meeting.

The ECB left the main refinancing rate unchanged at 0.5% and left other unconventional monetary easing measures unchanged. As mentioned in the policy statement, the "Governing Council expects the key ECB rates to remain at present or lower levels for an extended period of time". President Draghi also affirmed that further easing cannot be ruled out, and 0.5% is not the bottom-line.

The BoE left rates unchanged at 0.50% and asset purchase target at GBP 375b as widely expected. This was Mark Carney's first BoE meeting, and the accompanying statement was more detailed than usual. The statement noted that "the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy." The statement also noted that BoE will assess the possible use of forward guidance, like intermediate threshold, along with the August Inflation Report and would have an "important bearing" on MPC discussion in August.