There EURUSD which has been in coma it seems for months now, has finally showed some signs of life this week and that’s surely welcome news for the FX markets. There’s also been some quite big moves elsewhere too, namely in Oil and Gold which I will look at in a minute.
The market focus at the start of the week was still very much on geopolitics and trade -with China and Mexico, but now the spotlight has also turned on central bank policy, with the Fed and the ECB increasingly grabbing the limelight.
There is a growing assumption that the Fed will lower rates the week after next, on 19th. (I have my doubts about that though) Certainly, the latest ADP payroll report, which was so weak, has only served to put further pressure on the Fed to act and that’s what caused the dollar to fall on Wednesday.
Then, just yesterday the ECB pushed back on their rate outlook as well. This initially dented the EURUSD after it had traded above 1.13 the day before. However, the subsequent drop back to 1.12 was immediately reversed again as the ECB tweaked their bond program slightly, making it less generous to buyers than before.
Consequently, the EURUSD managed to regain the 1.13 handle yesterday afternoon, but not for very long as it couldn’t hold above there for a second time and has dribbled back, closer to 1.1250 as this morning gets underway. In part that’s probably also due to the proximity of the US payroll report due out at 1.30pm today.
The EURUSD chart below illustrates this weeks’s price action.
Looking at this chart of the EURUSD its clear to see an interim double top just above 1.13 now. It is entirely possible that the reason for this could be down to the same reserve manager(s) who for months have been soaking up the downside flow. Perhaps they are now happy to ease some out as the price rises? Hence, a clear break back above this level should open up further gains. Conversely a break back below 1.12 could open a retest of the bottom end of the most recent range.
Meantime the USDJPY looks like its trying to build a base at, or just below the 108.00 handle. This looks partly linked to the rebound this week in the equity markets with US bourses closing higher for a third successive day yesterday. That’s most likely due to optimism that the US, will not in the event impose tariffs on Mexico, and the China problem will eventually be resolved- once again we are sceptical on both.
However, its also worth noting the significant increase in Japanese FX reserves this month (released late on yesterday). That would indicate to me that the BOJ/MOF have been active in the US bond market most recently. If that is the case then it makes sense when one notes the huge demand for US Treasuries over the past week or so.
I rather suspect the downside on the USDJPY stalling for now is what put the brakes on gold this week too after the price lifted close to $1345. Naturally, the rebound in equities has played a role in halting that rally as well.
The other important development to take note of has been the move in WTI. Earlier this week, the drop to as low as $50.60 for crude meant that WTI fell into a bear market for 2019. Now, whilst that is an important technical development, I am weary of reading too much into this because we have seen this happen before last year, but the move was reversed as OPEC took action to ensure it wasn’t sustained. Indications this morning would suggest they are acutely aware of this again.
So, with that in mind I want to share another short term chart with you today on WTI where you can see how the price action indicates a potential rebound formation in the making. This could lead us to a further lift in prices, back above $55 so long as the price doesn’t reverse back down below $52.
Beyond all of the above, the focus for the markets today will be on the latest US (and Canadian) unemployment report due out at 1.30pm this afternoon. Quite often the market reaction to this report rather belies the build up, but this time around I think that’s not the case.
Given the immediate backdrop, any evidence of a marked slow down in US jobs growth, endorsing the latest ADP data will have a greater impact than usual. The average wages component will also be a key factor here as any signs of above average wage inflation will dampen the current enthusiasm for a Fed rate cut later this month. Conversely, lower payrolls and lower wages will only raise the volume on calls for the Fed to act.
The question really, beyond any immediate reaction, is how the markets view all this further out and whether or not the US is closer to a turning point in terms of the economic cycle. Several in the market are keen to keep the equity market party going, but the latest moves in the bond markets and gold do not really tally with that. So, something looks out of line here. Perhaps, come 1.31pm today we might get a better idea of which markets are leading us in the right direction?
Important Economic Releases Due Today
07/06- 1.30pm Canadian May Unemployment Report
07/06- 1.30pm US May Unemployment Report