USD Starting Key Week On A Weak Note, Likely To Bounce Back

 | Jun 03, 2013 07:24AM ET

The EUR/USD is backing up on the strength of the USD/JPY sell-off, and after a round of better than expected European PMI’s. This week’s U.S. data and ECB meeting could be decisive for the next few weeks of action.

As the USD/JPY teases the 100.00 level (100.10 is the low as I write), the EUR/USD is again trying to get comfortable back above 1.3000. I suspect a good portion of the EUR/USD upside is from the USD/JPY flows, which stayed heavy overnight after the ugly late action in U.S. equity markets on Friday that established the mood for the Monday opening in Asia. The Nikkei ended the day poorly once again, and has tumbled more than 15% from its highs from less than two weeks ago. The HSBC China manufacturing survey’s new low below 50 for the May reading got more attention than the more positive official PMI survey.

World PMI day
As mentioned above, the Chinese PMI data was strong on the official surveys, and weaker on the HSBC survey (considered more focused on the smaller enterprises). European PMI’s were mostly better than expected, but we have to remember that these are comparative to recent conditions, so below 50 still means things are worse - but a little less than the previous month. Meanwhile, PMIs for the U.K., Norway, Sweden and Switzerland were all above 50. The stronger than expected U.K. PMI is particularly giving USD bulls some interesting re-entry levels for shorts. Today’s U.S. ISM Manufacturing completes the world manufacturing survey picture. A reading of 50.7 is expected – the same as last month, although the market is perhaps looking a tad higher than that after a very strong Chicago PMI reading on Friday.

The RBA on tap tonight
The RBA is meeting tonight, and the market will focus mainly on rhetoric discussing the currency’s recent very marked weakness, and how this might impinge on monetary policy. It’s likely the monetary policymakers will not see any need to rush into another rate cut now, nor is one predicted. They are also likely to view the weakness in currency as somewhat welcome for the Australian economy while not weak enough to present any risk on the inflation front. All in all, the most we can expect is an excuse to squeeze AUD shorts a bit before the currency continues its sell-off.

Chart: AUD/USD
The momentum has been coming out of the AUD/USD sell-off, but then again the lack of a bounce is interesting as the buyers are hard to find. Looks like 0.9675 is the near term resistance, and 0.9400 is the next major target area.