USD primed for a short term recovery

There was fresh volatility in the FX space, with US dollar strength being the dominant theme.

It was an interesting night for risk assets as sentiment was quite positive in European trade on the back of a raft of better-than-expected PMIs on the manufacturing and services side. We saw a continuation of the data surprises, with US flash manufacturing PMI coming in at 53.2 (versus 52.5) while new home sales smashed expectations (497k versus 482k expected). This drove the USD higher as investors continued to assess tapering expectations.

AUD/USD was the biggest loser out of all of this, while USD/JPY was the biggest beneficiary. AUD/USD topped out at around 0.9320 in Asian trade yesterday and has since dropped to 0.916. Traders will now be watching for a move down to 0.90 in the near term; where it bottomed on July 12. There is no major local data to look out for today.

USD/JPY is back above 100 and managed to push to a high of 100.44 following the strength in the greenback. Japanese officials would be pleased to see the USD come back to life and indirectly weaken the yen. Today we get the weekly Japanese fund flow data and after two weeks of solid buying of foreign debt it will be interesting to see if this trend can continue. With Japanese yields falling, Japanese funds have been looking offshore for returns, and this is helping weaken the JPY on the idea of capital outflows.

EUR/USD pushed to a high of 1.326, helped by the better-than-expected PMIs, but dropped back into 1.32 as the USD strengthened. Later today we get Spanish unemployment and German Ifo business climate. Meanwhile in the UK we have GDP numbers where a 0.6% rise is expected. GBP/USD is trading at around 1.532 after encountering resistance near 1.54.

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