USD gets a pounding

It’s been a game of two halves in the FX market today. After retreating from earlier highs, some G10/ USD pairs have broken above some significant levels as the dollar sold off sharply this afternoon. The trigger for the buck’s bloodbath was some weak US ISM data for May. The index fell to 49.0, below expectations of 50.7, which is the lowest level since June 2009. The detail within the report was also weaker, including new orders, which fell into contraction territory for the first time since December 2012. Export orders and backlog of orders were also weaker, suggesting that the outlook for the US manufacturing sector is fairly weak for Q2. Unluckily for manufacturers, but luckily for the wider economy, manufacturing only makes up a small amount of the overall US labour market, so the weak ISM does not necessarily mean the NFP report on Friday is doomed.

However, the dollar’s sell off has been steeper than the sell-off in the stock market. There doesn’t seem to be too much logic in these moves, however, the FX market seems to have followed Treasuries, where 10-year yields have dropped 10 basis points since the ISM release. The dollar is sensitive to yields, so when yields are lower this can push the dollar down, while lower yields are actually positive for stocks.

Embrace volatility

Although the ISM report is only a survey reading, it highlights how messy the end of QE3 could become. For the best part of a year markets have not had to worry about much – QE3 was in full swing, on balance the US economy has been in recovery mode, and even the sovereign crisis in Europe had stabilised. However, now the markets have to find a way to interpret the threat of a slowing global economy, a patchy US economy recovery, the end of QE3 and on top of that strife in Turkey that is reigniting memories of 2011’s Arab Spring. Markets hate uncertainty, so we better embrace volatility if we are to get through this summer.

Lots resting on the NFP report

Obviously the big news comes later this week with the ECB meeting and the NFP report. The latter, in particular, will be one of the most important labour market reports for years, as it could give a good steer as to the end of QE3. Compared to this main event, we think the rest of the economic data this week is a sideshow. Although the weak ISM caused a sell-off in the USD, by and large the medium-term ranges are still persisting. USDJPY dropped 170 points at one stage and dipped below 99.00, however, so far, 98.70 – the 55-day sma and channel support – has managed to hold. Likewise, although GBPUSD is above key resistance at 1.5330 – the top of the daily cloud – it hasn’t been able to make too much traction on the upside. The commodity currencies have fared better; after all they were some of the most oversold USD crosses out there. For example, USDCAD is back below 1.0300; 1.0280 then 1.0250 are short term supports. AUDUSD has also had a nice move higher, and is back above 0.9700 – prior short term resistance. The Aussie pullback could be deeper, especially if we get a fairly neutral RBA overnight. Resistance levels from here include 0.9835 then 0.9895.

Gold is another big beneficiary of the sell-off in the buck. The overall commodity sphere is higher, however overall commodities have had a more mixed performance; in contrast gold is up $25 so far today, breaking above the key $1,400 level. Key support lies at $1,461 – the 50-day sma (on the close).

Overall, the market is still range bound, although some of the ranges have been pushed to their limits in the last few hours. This sets the scene for an explosive payrolls report that could trigger plenty of big moves and significant break outs later this week.

Between now and then keep your eye on the Nikkei because of its recent strong correlation with USDJPY. If it continues its decline (it is already down more than 15% in the last two weeks), then USDJPY could drop below some key supports, vice versa if it stages a recovery.

Источник: Forex.com

03.06.2013