Euro outperforms, dollar dips, dovish Fed expected ahead

USD/JPY Extends Slide, USD/CNH Closes at 9-Day Lows

The Euro outperformed, climbing to an overnight high (1.2100), settling at 1.2095 at the New York close. The shared currency shrugged off a cautious ECB with traders fixing their sights instead on upbeat Euro area and Eurozone Markit PMIs released on Friday. The US Dollar finished on a soft note ahead of this week’s Fed meeting (29 April, Thursday 4.30 am Sydney). While Chair Jerome Powell and the FOMC are expected to give a more positive view on the US economy, no shift in policy is expected until there is further progress. The USD/JPY pair eased, trading to 107.476, its lowest since March 5 before settling to close at 107.85, down 0.2% from 108.03 Friday. Sterling edged higher in lacklustre trade to 1.3880 (1.3841) despite better-than-expected UK Retail Sales data. The Australian Dollar finished marginally higher to 0.7741 (0.7713), sticking to a familiar range. Against its US counterpart, the Canadian Dollar extended its gains after the Bank of Canada announced that it would reduce the amount of government bonds it was purchasing. USD/CAD slipped to 1.2472 (1.2495 Friday). Emerging Market currencies were mostly stronger against the Greenback. The USD/CNH pair (Offshore USD Dollar-Chinese Yuan) ended at 6.4900 (6.4955 Friday), a nine-day low.

The Dollar Index, a popular gauge of the US currency’s value against a basket of 6 major currencies fell by 0.55% to 90.82 (91.27 Friday).

US Stocks were higher with the S&P 500 setting another new high at 4,196 before settling at 4,175.

The DOW closed 0.56% up to 34,005 (33,830 Friday open). Global bond yields were steady with the US Ten-Year Treasury rate settling at 1.56 % (1.54% Friday). Germany’s 10-Year Bund yield was at -0.26% (-0.25%).

Data released Friday saw UK Retail Sales (March-April) beat forecasts at 5.4% against 1.5%. Eurozone Markit Flash Manufacturing PMI’s rose to 63.3, beating forecasts of 62.0 while Services PMI’s rose to 50.3 from the previous month’s upwardly revised 49.6. Euro area PMI’s also mostly beat expectations with Germany’s Flash Manufacturing PMI climbing to 66.4 against forecasts at 65.8. US New Home Sales climbed to 1021K units, bettering expectations of 885K units.

• EUR/USD – The Euro reversed its grind lower, rebounding after a cautious ECB meeting outcome buoyed by upbeat Euro area (Germany, France, and Eurozone) Markit PMI readings. The shared currency outperformed its peers climbing to an overnight high at 1.2100 from Friday’s open of 1.2015, and an overnight low at 1.2012. This was the Euro’s highest close since early March (March 3). The Euro’s advance left the Greenback reeling against its peers.
• USD/JPY – the Dollar extended its grind lower against the Japanese Yen, slipping to an overnight low at 107.476 before rallying to settle at 107.85 at the New York close. The USD/JPY pair last traded at the 107.45 level in early March, after hitting 110.85 on April 2.
  The US 10-Year Treasury yield was at 1.71% then.
• GBP/USD – Despite better-than-expected UK Retail Sales data (5.4% vs 1.5%), the British Pound underperformed, settling at 1.3877 (1.3842), up 0.10%. Current tensions in Ireland have undermined Brexit’s progress which has weighed on Sterling. GBP/USD traded to an overnight high at 1.38953, failing to recover about the 1.3900 resistance level.
• AUD/USD – The Australian Dollar led the antipodeans (NZD/USD) higher with another lacklustre performance, sticking to a familiar trading range ahead of today’s ANZAC holiday (Australia and New Zealand’s commemoration of all Aussies and Kiwis who served and died in all wars and conflicts). AUD/USD settled at 0.7740 (0.7713 Friday) after trading in a familiar 0.7700-0.7760 range. NZD/USD meantime rose to 0.7200 (0.7167).

On the Lookout – After a tentative start on Friday where the US Dollar steadied against its peers, risk appetite returned to the markets. Equity prices rallied with the US S&P 500 hitting a fresh record high before settling to close 0.9% higher, at 4,175. (4,135.) Upbeat global Markit PMI’s boosted market sentiment and the US currency quickly reversed lower. This week’s big event is the US Fed meeting (29 April, Thursday 4.30 am Sydney). While the US economic recovery is accelerating, the benchmark 10-year bond yield has dropped to its current 1.56% level from 1.71% at the end of March. Treasury yields from other global peers have pretty much remained steady. Germany’s 10-Year Bund rate closed at -0.26% on Friday against -0.29% at the end of March. Japan’s 10-Year JGB yield settled at 0.06% Friday against 0.08% (31 March). The yield differentials between the US and its global peers have narrowed which has weighed on the US currency. If this continues, expect USD weakness to continue. Watch this space (yield differentials) as we head into a new week. The week ahead also sees the Bank of Japan’s Monetary Policy meeting with its Outlook report and Press Conference (Tuesday). US Consumer Confidence is also released on Tuesday. Australia’s Headline and Trimmed Mean CPI as well as Goods Trade Balance reports follow on Wednesday. Following the FOMC Meeting and Press Conference on Thursday is the US Advance GDP report (Q2).

Trading Perspective: The Dollar starts off on shaky ground in early Asia with the Euro settling near its overnight and 7-week highs (1.20925). Expect a slow start to the week with Australia and New Zealand celebrate ANZAC Day. Today’s data releases are light. Europe kicks off today with Germany’s IFO Business Climate Sentiment, where a slight improvement is forecast at 97.8 from the previous 96.6. The US follows with its Headline (f/c 2.5% from -1.2%) and Core Durable Goods Orders numbers (f/c 1.6% from -0.9%).

On Friday, Emerging Market Currencies also extended their gains versus the Greenback. The USD/CNH (US Dollar – Offshore Chinese Yuan) closed at 6.4900, after trading to an overnight and March 18 low at 6.4837. After its recent bout of appreciation, expect Chinese authorities to be vigilant on this currency pair, preferring the Yuan to stabilize current levels.

• EUR/USD – The Euro climbed steadily from its Friday opening at 1.2015, peaking at an overnight high of 1.2100, immediate resistance level. Which is also near the early March highs. EUR/USD closed on a firm note at 1.2092 with immediate resistance now lying at the 1.2110 level. Expect further resistance at the 1.2115 level (March highs) and 1.2120. Immediate support can be found at 1.2060 and 1.2020. Keep an eye on the differentials between US and German bond yields. They have continued to narrow which has boosted the Euro’s appeal. Any change in this could see some of the shared currency’s recent bullishness to fade. For today, looking for a likely trading range of 1.2040-1.2120. The air is a little too thin up here and my preference would be to sell the rallies today.
• USD/JPY – The Dollar Yen edged lower to 107.85 a modest decline for the Greenback. Against the Japanese currency, the Greenback has dropped from its 111.00 peak at the end of March. USD/JPY traded to an overnight and early March low at 107.476 before rallying to settle a touch higher at the NY close. The yield gap between the US and Japanese 10-year bonds have narrowed to 1.5 basis points on Friday from 1.62 basis points in late March. Which is huge for this currency pair. We can expect some early selling in USD/JPY to its support level at 107.40-50 level. A clean break of this level should see 106.80, which is the next strong support level. Immediate resistance can be found at 108.00 and 108.20. Watch the yield differentials for the next clue with the FOMC meeting outcome to set the tone. Meantime, I’m content to trade between 107.50-108.20.
• AUD/USD – The Aussie has traded between 0.7700 and 0.7800 range for the second half of April. On Friday, the Battler had a lacklustre session, trading between 0.7700 and 0.77604 before settling at 0.7742 currently. While the softer US Dollar has kept the Aussie supported, its struggling to break higher, unlike some its other peers. AUD/USD has immediate support at 0.7700 and 0.7670. Immediate resistance lies at 0.7800 and 0.7830. We would need to see a clean break above 0.7830 or below 0.7670 for the Battler to get to new ground. This week’s major Australian data release is the Headline and Trimmed Means CPI (Wednesday, 28 April. Australia’s Goods Trade Balance is also released then. Meantime, expect the AUD/USD to consolidate between 0.7680 and 0.7780 today.
• USD/CNH – while this is an Emerging Market Currency, the current levels bear watching as well as its influence on the EM currencies. Which, at times, dictate the moves of the majors. The US Dollar has grinded lower against the Offshore Chinese Yuan from a high at 6.5790 (April 2) to a 6.4900 close on Friday after hitting a low at 6.48368 on Friday. The Offshore Chinese Yuan has appreciated around 0.85% in the past two weeks alone, more than some other Asian peers.  Chinese PMI reports are released Friday. The Chinese authorities could be vigilant should the CNH appreciate further. Expect the USD/CNH to stabilize around this 6.49 area with strong support at the 6.4810-6.4840 level. Immediate resistance can be found at 6.4970 and 6.5020. Would look to pick up some USD/CNH at lower levels should it get there.

Watch those treasury yield differentials. An trader’s key armour in the old days but this indicator still works today. Have a good start to the week and happy trading all.