On the surface, the poor ADP employment data and slightly stronger than expected ISM non-manufacturing and factory orders muddled the US growth outlook. The logical reaction should be lower expectations of Fed moving on rates next month. However, USD continued to march steadily higher after the dollar index hit a 16-month low below 93.
Much of the move however, is due to the paring of long JPY positions. The Japanese yen surged to an 18-month high, after the Bank of Japan maintained policy last week, surprising most market participants. The JPY strength prompted Finance Minister Taro Aso to remark that such movements are “extremely concerning”.
Some investors probably feel that there is an increased possibility of government intervention as USD/JPY head towards the 105 mark, and therefore decided to take some of their JPY bids off the table. This helped USD to strengthen broadly.
Further USD up-move depends on how the market expectations will evolve around Fed policy. Should more Fed officials, particularly FOMC voters, start to sound more hawkish, the market would interpret it as preparation for a nearing rate hike, and react accordingly. As of now, market participants are still pricing a low probability of a June rate move, seen at 10% according to the Fed funds futures.
There was more pullback in oil prices as the US EIA report shown a larger than expected climb in US crude stockpiles, adding another 2.8 million barrels. Taken in conjunction with earlier reports that OPEC increased its production in April to an average of 33.2 million barrels a day, it is foolhardy to think that the supply glut issue is going away any time soon.
Given the weak leads from the European and US markets, and the pullback in oil prices, Asia is set for another risk-off session on Thursday. The Straits Times Index has been under significant pressure since mid-April, closing down for a straight eighth sessions yesterday, losing around 190 points, and 6.3%, since hitting a six-month high at 2964.1 on 21 April.
Yesterday: S&P 500 -0.59%; DJIA -0.56%; DAX -0.99%; FTSE -1.19%
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