Still Room For USD Weakness
Swissquote Bank Ltd | May 04, 2016 07:46AM ET
Forex News and Events
Still room for USD weakness
Risky assets continued to sell-off following yesterday’s weak equity performance. US equity markets closed lower as disappointing reads from China and UK manufacturing refocused US investor’s attentions on weakness abroad. US treasury yields halted their downward march but hardly reversed the bearish trend as demand for safety remained strong. U.S. 2-Year yields are now consolidating around 0.75%, while 10’s are below 1.80%. In FX markets the USD has marginally rallied as traders move into safer assets. However, without interest rate support we do not expect this move to be stable. Short term USD buying was also supported by comments from Atlanta Fed President Dennis Lockhart who, despite an overriding dovish tone, indicated that June will be a live meeting. Today’s ADP and employment component of the services ISM is expected to highlight a slowdown in US labor market growth and Friday’s critical payroll report. Economic weakness that will further lower the market’s expectation for two rate hikes in 2016 and send USD bulls to the exits. Despite near bottom Fed pricing we do not see any fundamental rational for an extended reversal in USD selling. However globally, there is growing discontent over the trend and pace of USD depreciation. The RBA surprise rate cut indicated that an appreciating exchange rate could “complicate” adjustments and further cuts to record low cash rate of 1.75% could occur to ward off unwanted AUD strength. In Japan, Bank of Japan Governor Kuroda and Finance Minister Aso have bombarded the market with threats that ‘intensification’ of yen movements could trigger action (direct FX intervention). We should not forget that we are in the middle of a ten year "Currency War" where excessive USD weakness could trigger policy actions.
US ADP payroll data ahead of NFP
Financial markets are still looking for evidence that the Fed will raise rates this year and are unconcerned about their dovish stance especially as a loose monetary policy benefits the stock markets. However, in the long run, the resulting bubble could burst very strongly. The labour market is perhaps one of the best performing US fundamentals (if not the only one) with unemployment at almost 5%. However, inflation is clearly not picking up and the March release stood below 0.9% y/y. Retail sales growth is also lower however the March print was at a decent 1.7% y/y.
The results of massive easing have not yet managed to put the US economy back on the road to sustainable recovery. Today marks the starting day of US jobs data with the ADP release ahead of Friday’s NFP data. The April ADP Employment change is expected this afternoon at 195k new jobs vs 200k in March. We do not believe that US soft data will not be reflected in some way in the job market and expect a weaker number. Currency-wise the EUR/USD should continue to move higher and as we have already mentioned, our mid-term target for the pair is 1.2000.
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Due to the European holiday there will be no reports released on May 5th 2016.
The Risk Today
EUR/USD has moved lower after recent surge. Hourly resistance is located at 1.1616 (12/04/2016 high). Hourly support is located at 1.1370 (29/04/2016 low) and stronger support can be found at 1.1144 (24/03/2016 low). Expected to show further increase within the uptrend channel. In the longer term, the technical structure favours a bearish bias as long as resistance at 1.1746 ( holds. Key resistance is located at 1.1640 (11/11/2005 low). The current technical appreciation implies a gradual increase.
GBP/USD has lost two figures yesterday and is now approaching support at 1.4475 (27/04/2016 low). Hourly resistance is given at 1.4770 (03/05/2016 high). Stronger resistance is given at 1.4969 (27/12/2016 high). Expected to show further consolidation before entering into another upside move. The long-term technical pattern is negative and favours a further decline towards key support at 1.3503 (23/01/2009 low), as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200 day moving average). However, the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound.
USD/JPY has moved sharply higher. Hourly support lies at 105.55 (03/05/2016 low). Hourly resistance can be found at 107.42 (29/04/2016 high), stronger resistance can be found at 111.88 (28/04/2016 high). Expected to show further weakening. We favour a long-term bearish bias. Support at 105.23 (15/10/2014 low) is on target. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems now less likely. Another key support can be found at 105.23 (15/10/2014 low).
USD/CHF is clearly oriented downwards on the medium-term and has broken multiple supports. Yet, the pair is bouncing back today towards hourly resistance at 0.9605 (02/05/2016 high). Hourly support is given at 09444 (03/05/2016 low). Expected to show further further weakening. In the long-term, the pair is setting highs since mid-2015. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours a long term bullish bias.
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