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With China closed, there have been limited leads regionally, leaving investors to focus primarily on the US dollar and related asset classes. Taking a step back and looking at the move in US markets, equities continued to tumble as a number of factors weighed, including a correction for the Russell index and a round of mixed economic data.
While the headlines were around the S&P breaking key uptrend support and equities potentially heading into correction territory , I actually felt the pullback in the USD was the most significant move. The greenback’s rally paused as bonds rallied and yields fell.
Economic data was mixed. The ADP non-farm payrolls reading coming in at 213,000, beating expectations of 207,000, confirming that the economy is strong. This is a good start heading into Friday’s official payrolls data.
Manufacturing data tapered off a bit but still remains quite robust compared to the US’ global peers. The overnight weakness in the greenback saw the recent trends in major currency pairs temporarily stall.
Japan slumps as yen strengthens
The biggest move was perhaps in USD/JPY, which has dropped below ¥109 after having traded through ¥110 just yesterday. This resulted in a fairly hefty pullback for the Nikkei today as the index dropping below 16,000. However, the Nikkei and USD/JPY are still in a fairly strong uptrend and investors who can hold their nerve will probably be looking to buy the dips.
AUD/USD has been another pair that’s seen a reversal sparked by USD weakness. The pair reclaimed the $0.8800 handle today, helped by some better-than-expected building-approvals data. I feel this will only provide more opportunities to get short.
The $0.8660 (January lows) level managed to hold, although I feel a retest could be on the way in the near term. Later today, we have unemployment claims out of the US from last week, which will help formulate the 4-week average for the month and help shape non-farm payrolls expectations.
Euro bounce likely temporary
Looking ahead to European trade, we’re calling the major bourses modestly weaker. EUR/USD has enjoyed a bit of a relief rally but I feel the ECB will be looking to keep the euro weak and prevent any short covering.
EUR/USD held on to the $1.2600 handle and we’ll be watching to see how traders position themselves heading into the ECB meeting. With inflation remaining benign for Germany and the region, along with a drop off in manufacturing, the ECB has a real task ahead of it. I would be taking advantage of any strength and using it as an opportunity to sell in the near term, especially on rallies towards $1.2700, as there is downtrend resistance which kicks in in this region.
While the ECB is unlikely to announce further stimulus, it’ll be interesting to hear what they’ve got to say – particularly about the low uptake in the recent TLTRO allotment. The general consensus is that the uptake will pick up in December, but there would be unanswered questions should this not come to fruition. This would put the focus on details regarding the ABS program and its covered bond purchase program. Meanwhile, the sceptics will continue to point towards the need for regional structural reform in order to make progress.