Dollar index heading towards 81

There were further gains in the US dollar index as traders added to their USD longs.

The DXY was last at 80.73 and remains within striking distance of 81 heading into the business end of the week. A better-than-expected ISM non-manufacturing PMI (55.4 versus 54.2 expected) set the tone for the tapering argument and resulted in continued confidence for the greenback. There were also some comments from Fed member James Rosengren questioning the costs of maintaining QE.

While we are seeing some interesting moves in FX, there is still a generally calm tone. With the crucial non-farm payrolls reading due out later in the week, positioning on the USD is likely to ramp up.

Limited yen reaction to minutes

USD/JPY recovered from a dip to 98.17 and is back in the 98.50 region, with today’s monetary policy meeting minutes having minimal impact on price action. The key takeaways from the minutes were that some members feel the CPI increase may pause and also feel the government fiscal reform stance may weaken. This was enough to underpin the pair and see it maintain its strength early in Asia.

It’s a relatively quiet week on the Japanese economic front and I feel most of the volatility in the pair is likely to come from the USD side of the equation. Buying dips in USD/JPY, particularly back into 98, is probably the best value play in the pair at the moment.

Aussie trade data beats estimates

AUD/USD is consolidating around 0.95 and not even a better-than-expected trade balance reading was enough to move the pair. Australia posted a trade deficit of A$0.28 billion which was better than an expected deficit of A$0.51 billion. This is an improvement on the previous reading and perhaps the recent strength in PMIs globally might be positive for this data today. I expect to see some consolidation heading into tomorrow’s jobs data. Selling into strength remains the preferred strategy; particularly moves into the 0.96 region.

Single currency remains sidelined

EUR/USD is flat lined heading into the ECB meeting with plenty of uncertainty about how it will all play out. While most analysts are in the camp that the ECB will set up a cut for next month at this meeting, mixed economic readings also make a case for a wait-and-see approach. With so much confusion I feel reacting to the ECB is probably a better play than pre-empting a decision. Unless the single currency jumps heading into the ECB, I would not be looking to sell it at these levels.

Later today, Europe’s focus will be on services PMIs from Spain, Italy and for the region. There is also European retail sales data and German factory orders to look out for. In US trade tonight we get September leading indicators (expected +0.6%), while Fed member Sandra Pianalto speaks on the economy. 

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