There hasn’t been much progress in the currency markets overnight as both US yields, and the US dollar continue to struggle. And for the time being, equity markets continue to be cheered by improving earnings.
Dealers remain in cautionary, wait-and-see mode ahead today’s high-risk events that lay in waiting.The focus today should be on the ECB, BoJ and Australian Employment data.It’s been somewhat directionless trading as both USD/JPY and EUR/USD moderated on the back of profit-taking while AUD/USD carries on higher into the local jobs data.
But President Trump’s Administration is worth keeping an eye on as the political quagmire thickens.
Australian Dollar
Still waiting for the dust to settle on this trade as the Aussie is holding firm above 0.7950 after breaching the top of the two-year range earlier in the week. There has been very little retracement as dealers position to continued improvements in the domestic labor market.
As we approach the AUD$0.80 level, it suggests we’re beyond the fear of missing out on a policy shift trade. And while we can argue till we're blue in the face this move is overdone. The reality is the Aussie is in demand.
Equity markets are getting cheered on from every level, and the steady beat of the Chinese economy has seen iron ore prices rising. Also, the rally in WTI spurred on by a larger than expected drop in crude oil inventories is helping sentiment across the commodity block this morning and with implied volatility dropping, there is definitely some yield appeal for Aussie assets.
Australian Jobs Data
The Australian Jobs data just missed estimates, but this is robust enough to push the Aussie dollar higher with the full-time employment change greater than expected. On cue, the Australian 3-year yield is trading at the highest since December 2015, following full-time employment change. The Aussie is stalling after the initial move, suggesting some initial profit taking setting in. Regardless, the AUD continues with its gravity defying act, and a push through 0.80 is likely in the cards.
Euro
Despite the mild pullback on profit taking, which was expected ahead of today’s ECB, the trend remains intact. And while there is probably a greater chance the ECB will disappoint as opposed to affirm the market's hawkish conviction, but even then, the euro should continue to be a buy-on-dip given the US dollar weakness and the market looking to September for the key policy shift.
The one concern into the ECB is market positioning which, needless to say, is long. So if there is a very dovish surprise, the short term longs will run for the exits, and it could get messy for a while.
Japanese Yen
The BoJ is unlikely to move markets much on Thursday although it is expected to upgrade the economic assessment more or less. Sources on Tuesday discussed the possibility of CPI estimates being reduced and while unlikely it’s still a risk
The USD/JPY is more about the crowded EUR/JPY positioning, so a move lower in EUR on the ECB could see a sudden unwind of EUR/JPY and drive the USD/JPY lower.