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US dollar continues to rally

The US dollar index continued its comeback, with a move back above 80 sparking fresh interest for greenback longs.

All trading involves risk. Losses can exceed deposits.

Driving the greenback was a strong ISM report (56.4 versus 55 expected) which saw the US dollar index rise to 80.72. Additionally, a couple of Fed members who spoke failed to rule out tapering by the end of the year despite one of them (James Bullard) being a well-documented dove. There was a big move higher in USD/JPY, which printed a high of 98.85 and remains fairly elevated early in Asia.

BoJ Governor Haruhiko Kuroda is set to speak tomorrow at a meeting with business leaders. While Japan is closed today, I feel the USD side of the equation will be the main driver of price action. We have a raft of Fed members speaking this week with Bernanke, Stein, Powell, Fisher, Rosengren, Lacker, Williams, Pianalto and Lockhart all on the calendar. On Friday we have a non-farm payrolls print which is expected to have significant downside risk, given it was taken from a sample which was right in the middle of the shutdown.  The market is looking for a reading of 126,000 and any surprises to the upside would surely be USD positive.

AUD bounces on retail sales

AUD/USD is off Friday’s lows and is heading back towards 0.95 on the back of a strong retail sales reading. Retail sales came in at 0.8%, much better than an expected 0.4% and giving further evidence that the recent easing cycle is beginning to pay dividends. I feel selling risk currency pairs into strength is the most logical trade this week given the US dollar is dictating the pace at the moment.

It’s a big week for the local currency; with the RBA decision and statement due out tomorrow. The RBA is expected to remain on hold, with a wait-and-see approach going forward. We also have the official jobs numbers reading on Thursday where the unemployment rate is expected to tick higher to 5.7%.

ECB meeting in focus

The single currency has been under immense pressure over the past few sessions in the aftermath of that poor inflation reading from last week. EUR/USD has now slumped below 1.35 and is currently in the 1.348 region. There has been consolidation in the 1.345 region in the past and perhaps we might see it find near-term support around here. Selling into strength is likely to be the preferred strategy heading into the ECB meeting and PMIs for the region due out later today could provide some short-term strength. One of the ECB’s prime objectives is inflation stability and I feel last week’s poor reading will prompt some action. A growing number of analysts feel the ECB will cut rates and perhaps even strengthen forward guidance after inflation came in at the lowest level since 2009.

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