The Dollar Gives Back Ahead of US Payrolls

Since my last update the dollar has given up its most recentgains following what was a mixture of news that has dented the greenback somewhat. First it was the release of the ISM manufacturing index on Tuesday, coming in below 50 for the first time in many months that really set the ball rolling. This led to further US recession concerns and speculation that the Fed will now be more likely to lower rates from heron in. The upshot of that was that it sent the USD into a technical reversal against both the EUR and the GBP and in the process,a similar move in the USD index itself.

Secondly, we had news out of Hong Kong that the government there was to repeal the extradition law, followed by better news from Italy on the political front. The combination of all this, more positive geopolitical newshelped the risk outlook and also dented the JPY and hence the likes of the GBPJPY and EURJPY rebounded equally sharply too.

Naturally, the GBP had reasons of its own for rebounding which I think don’t need regurgitating here. Anyway, so what we had, is what is known in the trade as a positive ‘Key Day’ or ‘Outside Day’ reversal on both the EURUSD and the GBPUSD, from what were fresh 2 year lows on both pairings at 1.0926 and 1.1959 respectively. The rebound move on both continued into yesterday as well with the GBPUSD reaching above 1.2350 and the EURUSD above 1.1075. Yesterday some pundits were touting the prospect of the GBPUSD rebounding to as high as 1.25, but once again it looks like we’ve stalled shy of 1.24 at a second time of asking.  

Indeed, both the GBPUSD and the EURUSD have backed off a bit over the past 12 hours ahead of the US employment report due later this afternoon. That’s most likely because the latest, private ADP payroll report was really very good yesterday, coming in closer to 200k, rather than the sub 150k number that had been widely expected.

Consequently, if that number is replicated in the wider report this afternoon, then that may only serve to contradict the news, earlier in the week from the ISM report. I guess as usual it might boil down to what the latest wages component of the report reveals today. If wages are not rising then a rebound in payrolls may not be enough to shake the current shift in terms Fed policy outlook, but we shall just have to see what shows up later on before casting any judgment on that.

In following on from what I said in my last update, there’s a couple of things to note. Firstly, that the GBPEUR has met the first of its technical retracement targets at 1.1136. In fact, its surpassed that level as you can readily see on the chart below, and depending on the news this one could easily carry on to reach the 50% retracement target at 1.1263. However, it will probably need more Brexit news to achieve that; Johnson getting ditched perhaps?

Leaving that aside, the less said about the current state of UK politics the better I think.

Secondly, the subject that I touched on in regards to Japanese FX reserves data, which has been released overnight. There was a quite sizeable increase in Japanese FX reserves in August, more than offsetting the $5 billion decline in July with a $15 billion increase. Furthermore, from the data breakdown table of that; it looks like most of it went into USD because the $13 billion increase in foreign currencies was set against an increase of some $13 billion into foreign securities.

Now of course that’s not definitive proof that its all in USTs, but I think its highly likely that is the case. Some of the increase could also be down to coupon payments, but extrapolating that is not easy quite honestly. Consequently, and as I was inferring, it does rather look to me like the BOJ has indeed been active in defending the USDJPY at 105.

Lastly today, a word about gold which lifted to a fresh 6year high on Tuesday at $1557.11. Well, since then its been struggling and the weaker dollar hasn’t done it any favours either and the move below $1530 yesterday saw a few longs exiting the market, after what were 3 clear price failures above the $1550 level. Indeed, that move has extended again in early trading this morning with the price heading closer to $1500 as I write here.

Naturally this has all been also propelled by fresh risk appetite coming into the equity space as well, which in turn has impacted the bond market with yields almost everywhere rising over the past 24 hours.  I think perhaps its was the latterof those drivers more than anything else which has helped to push gold lower again this morning. However, I am not sure the metal is done with just yet and that buyers will return, most probably at more attractive levels the other side of $1500.

Important Economic Releases/Events Due Later Today.

06/09- 1.30pm Canadian August Unemployment Report

06/09- 1.30pm US August Unemployment Report