The rally yesterday in EURUSD was likely driven by a rich cocktail:
1. weak risk appetite with technicals looking increasingly ominous in the US as the S&P500 index closed below its 100-day moving average yesterday
2. the comments on the USD attributed to Obama who likely did say something, but it was not expressed through official channels and actually later officially denied
3. fresh fuel from USD shorts put on hastily in the wake of Friday’s strong US jobs report.
In addition, a plunge in Greek yields on talks that tomorrow may bring more clarity on Greece’s ongoing negotiations with creditors may have contributed to the euro upside, though the complacent EURCHF suggests otherwise.
More verbal intervention from Japanese Prime Minister Shinzo Abe and the general risk off tone yesterday saw USDJPY tumbling from its fresh, post-NFP highs and the technical situation there favours consolidation rather than the prospect of immediate further gains as discussed below.
Note the weakness in the commodity currencies on these latest developments, as they are failing to rally much against the USD even as the USD is weak elsewhere, a trend that is likely to continue as long as poor market nerves continue to plague markets.
The next sentiment test for risk appetite likely comes in near major 200-day moving averages, which are still quite far away in the case of the German DAX index, but only about 1.5% away in the S&P 500.
USDJPY rally rejected
A classic confirmation of a minor momentum divergence pattern (higher price not coinciding with higher momentum as indicated in stochastics) yesterday as Friday’s rally was entirely rejected.
It could see the market focusing lower toward at least 123.20 (the 38.2% retracement) if we see a shallow consolidation, while the 122.00/121.50 is the important structural support for this rally.
The G-10 rundown
USD: Suffering on the risk-off tone yesterday, which may offer further headwinds in the nearest term, though not giving up on the longer term view toward a stronger USD.
EUR: The quality of this rally is very tough to judge as it feels like conviction may be low in both directions at the moment. Let’s see if we can take out the range highs above 1.1450 before believing in a test-of-the-200-DMA scenario (rapidly descending from 1.1765 area). Risk off will likely continue to favour euro higher versus the weak commodity currencies and even GBP.
JPY: Getting broader traction this morning against most of the major currencies on the risk off tone – though its full potential may only be realised if the risk off is accompanied with a bond market rally.
GBP: Trading like a low-beta USD, getting mashed under the weight of the euro rally, but sterling is stronger versus the USD. This will likely end when the USD rallies again.
CHF: Still waiting for more definite news from the Greece situation with the belief that downside risk for the franc vastly outweighs upside risk.
AUD: AUD underperforming amid weak risk appetite – the question is whether AUDUSD downside or EURAUD upside is the best way to express this, with the latter moving more sharply at the moment.
CAD: Risk off providing little reason to sell much below 1.2400 in USDCAD. May have to allow some slippage lower as long as the USD is under pressure elsewhere, but eventually looking for signs of the rally to resume.
NZD: Two-way risk on Thursday’s (late Wednesday for those of us In Europe) Reserve Bank of New Zealand as the market is divided on the likelihood of a cut – generally preferring a weak NZD in the longer run, whether in AUDNZD or in NZDUSD. If the RBNZ fails to cut, we could see a significant near-term squeeze on a market that has likely gotten increasingly short the kiwi.
SEK: EURSEK leaning higher, but the range (with slippage each time) has held for more than two months. Data flow of interest over the next couple of days from Sweden in the form of April Industrial Orders/Production tomorrow and CPI on Thursday.
NOK: With smaller currencies weak as long as we’re in risk-off mode, risks of further EURNOK upside toward 9.00 ahead of next week’s Norges Bank meeting.
Economic data highlights
- New Zealand Q1 Manufacturing Activity out at -2.8% QoQ
- UK May BRC Sales, Like-for-like out at 0.0% YoY vs. +1.2% expected and vs. -2.4% in Apr.
- Australia May NAB Business Conditions/Confidence out at 7/7 vs. 4/3, respectively, in Apr.
- Japan May Consumer Confidence out at 41.4 vs. 41.9 expected and vs. 41.5 in Apr.
- Switzerland May Unemployment Rate out unchanged at 3.3% as expected
Upcoming economic calendar highlights (all times GMT)
- UK Apr. Visible Trade Balance (0830)
- Euro Zone Q1 GDP (0900)
- US May NFIB Small Business Optimism (1000)
- Japan Apr. Machine Orders (2350)