Thursday 2nd June 2011
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IG Markets Chris Weston offers a look at worldwide currency trading
Asian traders took the brave decision to counter-trade the strong downward move overnight by US and European traders. The different news releases overnight were undoubtedly bearish and risk was dealt a firm blow to the midriff. The euro was sold off heavily against the JPY and the USD, plus made a new record low against the CHF. The ‘swissy’ benefited not just from risk aversion flows, but was probably the only country in the world releasing encouraging domestic data, with strong PMIs and retail sales that show that it trades as a growth currency in its own right. Elsewhere, the EUR/USD was supported to a degree on speculation that Greece will soon see a second bailout which could involve sizeable rolling over of existing debt, extensions of maturities and even a lump sum of money from the IMF and ECB. However, Moody’s late session downgrade of Greek debt by one notch and assigning a negative outlook caused some of that positive sentiment to unwind. The EUR/USD made a low of 1.4308 just after the US close, so the fact that it pushed up to 1.4366 is positive. Technically, it was interesting that the EUR/USD failed to break above the 50% retracement of the May sell-off which we had alluded to in the last two reports, so this should mark a good short opportunity going forward. On the other hand, the data out of the US has been poor, and with fears of a ‘double-dip’ resurfacing, the USD is struggling to gain any traction even against the euro. This means that traders could look to step in and buy dips at 1.4270 (38.2% retracement of the recent rally from 1.3975 to 1.4455). The main point of focus for traders will be tonight’s US initial claims and Spanish employment rate.
The USD/JPY traded off session lows of 80.82 to push back above 81.00 and onto a high of 81.33, taking its lead from the Nikkei which also saw buying interest after the unwind of the market. The key pieces of data overnight were the ADP private sector job and the ISM manufacturing reports, which both missed estimates by some way. This was evident in the strong buying in US treasuries with the ten-year yield dropping twelve basis points; the lowest level this year. The miss on the ADP private sector job print was substantial and we saw the likes of Goldman Sachs and UBS cut its assumptions for Friday’s all important non-farms jobs report with the overall consensus now standing at 170,000 jobs created. Tonight’s US initial jobless claims will be closely watched to see if the trend of above 400,000 claims continues. Whilst we have not seen the most accurate non-farm leading indicator (the employment component of the service PMI data), all the other data points have been poor and we would not be surprised to see a number south of consensus. This has put more pressure on the USD/JPY, so we believe traders will continue to sell into rallies at present. Japanese data today did not ignite a huge amount of volatility, with the monetary base increasing 16% and 1Q capital spending increasing 3.3%. However, most of the domestic focus is on prime minister Mr Kan and speculation that he will look to step down at the end of this year.
Not surprisingly, the AUD was met with heavy selling overnight as investors dumped commodities and risk currencies. This occurred after extremely poor manufacturing and private sector employment reports fuelled already growing concerns about the strength of the US economic recovery. From the Australian market’s 4pm close to the end of the US session, the AUD fell from 1.0740 to around 1.06. Upon beginning Asian trade as 1.0614, the AUD drifted to a low of 1.0587 after the ASX 200 opened nearly 2% lower in-line with US leads. However, after mid morning retail sales figures for April rose more sharply than expected (1.1% versus a 0.4% consensus), the AUD got a renewed ‘shot in the arm’ and quickly recaptured the 1.06 level, surging into the 1.0640 range. The market no doubt took this data point as an additional ‘tick’ for a rate hike in the coming months. The AUD currently sits at 1.0620.
The sterling came under strong selling pressure overnight as sharply weaker-than-expected UK manufacturing PMI saw long traders running for the exit door and a fresh wave of new selling. For the third straight month, British manufacturing PMI missed expectations, coming in at 52.1 from 54.4 in April, versus market expectations of 54.2. It was nearly the slowest pace in two years as output and new orders fell, raising serious questions about where economic growth will come from and how the Bank of England can conceivably think about raising interest rates to battle inflationary pressures. It hit a high of 1.6494 in early European trade before moving down to a low of 1.6329; it’s currently a few pips higher at 1.6430. As we mentioned yesterday, the resistance through the 61.8% Fibonacci retracement at 1.6480 was evident again overnight as sellers moved into the market, driving it lower. During the Asian session, the market looks to have found some interim support just above the 1.63 figure, which coincides with previous highs around the 1.6305 level. Looking ahead to European trade, traders are going to be focussing on overall risk appetite as well as the latest reading on UK construction PMI which is due at 6.30pm (Melbourne Time). As it stands, the market is expecting a figure of 53.7 following last month’s 53.3.
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