USD Looks To Maintain A Head Of Steam This Week

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The greenback finished last week with a flourish and may keep up a head of steam this week, with the risk that the JPY spoils the party at some point.
Last week ended with a crescendo of USD buying on the stronger than expected US payrolls data, as EURUSD slammed all the way back down to the head and shoulders neckline area – more on this below – and GBPUSD is suddenly starting those multi-year lows below 1.4900 in the face again.
Weak SEK
Last Thursday’s reversal back through key support in EURSEK in the wake of the Riksbank and ECB meetings was quite the fakeout, by all appearances, as the pair sprang back into the range on Friday and rallied strongly early today on the very weak Swedish industrial production and industrial orders figures. The krona will fare even worse if global liquidity conditions worsen (a significant risk) and I wouldn’t be surprised to see the 9.00 level coming back into play in coming days/weeks for the first time since May of last year.

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• Tomorrow is likely to offer the first “data test” of the GBP sell-off, as we have UK Trade Balance and Production data on tap. Watch EURGBP and 0.8600 area on the heels of this one.
• Wednesday, we have the FOMC minutes for the June FOMC meeting and Bernanke out speaking on “100 years of the Federal Reserve- the policy record, lessons learned and prospects for the future”. Remember that Bernanke’s future is very limited and that we are probably weeks from an announcement and possible nomination of a Fed chairman replacement
• Thursday we have the Australian employment report and another Bank of Japan meeting.

The spike in global yields while equity markets (at least US equity markets) try to mount a comeback is incompatible. There are shades of 1987 written all over the situation (when a huge rise in yields all through the spring and summer were ignored before equity markets suffered a catastrophic meltdown in September and of course, mostly one day in October). Zero Hedge asks whether the current setup is actually an analogue situation in a post over the weekend.

On that note, I still believe that the Yen is the flipside of risk appetite at the moment – the probably being that the JPY has a hard time firming in any meaningful way as long as bonds are weak – so a consolidation in bond markets would likely be needed in order for the JPY to make its move. As I suggested on Friday a significant move in JPY crosses to the downside in a second round of consolidation remains a risk.

For the US dollar, it is a game of cat and mouse with the key structural EURUSD and GBPUSD setups – do we sustain the momentum or backfill for a while before cutting lower. I expect and hope that we are “done with” the 1.3000 level for now in EURUSD, as we are more likely to gravitate towards 1.2000 next once the local support here and at 1.2750/1.2660 is taken out. As for USDJPY, I still think the upside potential is limited if we get more of a liquidity pinch. Elsewhere, AUDUSD is threatening new lows again and NZDUSD is doing the same after spending over two weeks churning in a range.

Chart: EURUSD
We’re back at the neckline everyone was watching in the mid-May timeframe before the pair launched a huge rally and spoiled a nice symmetrical head and shoulders formation with a mutated extra right shoulder. A break of the 1.2750/1.2660 levels could open up for an eventual test of 1.2000.