The euro rallied yesterday, perhaps as the ECB appeared less dovish than many may have expected. The Bank pushed back its forward guidance by six months and announced the details of its new series of TLTROs, but investors may have anticipated more. Perhaps a longer extension of the guidance, or strong hints with regards to additional easing measures. As for today, investors will turn their attention to the US employment data in their attempt to figure out whether and by how much the Fed could ease in the months to come.
The euro traded higher against most of the other G10 currencies and responsible for that was the ECB and its President Mario Draghi. The common currency gained the most against JPY, NZD and USD, while it slightly underperformed versus CAD and NOK, which may have been benefited by the rebound in oil prices.
Yesterday, the ECB decided to keep all three of its interest rates unchanged as was widely anticipated, while the accompanying statement had an even more dovish flavor than the previous one. Officials decided to push back the timing of when they expect interest rates to start rising, noting that they expect rates to stay untouched “at least through the first half of 2020.” The prior guidance was for rates to remain unchanged “at least through the end of 2019”. What’s more officials provided the details of the new series of TLTROs. They decided that the operations will be priced in 10bps above the main refinancing operations rate, while for banks whose eligible net lending exceeds a benchmark, the rate could be as low as the deposit facility rate plus 10bps.
And yet, the euro surged at the time the statement was out. Perhaps investors were expecting the Bank to push back even further its forward guidance. After all, they were already pessimistic on that front, with Eurozone money markets suggesting 10bps cut in the deposit rate by March 2020. It could also be that they were expecting the TLTRO-pricing to be even more favorable. The common currency got another shot in the arm during President’s Draghi press conference, at which the ECB Chief noted that the positive contribution of negative rates is not undermined by possible side effects on bank intermediation, which may have come as a disappointment to those expecting hints on measures like a tiered deposit rate that was rumored ahead of the prior meeting.
Moving forward, the euro could continue gaining for a while more due to a less-dovish-than-expected ECB, but we stay reluctant with regards to a sustained rally. Yesterday, Draghi said that several members raised the possibility of further rate cuts, while others talked about restarting QE, in case of adverse contingencies. Thus, we prefer to stay data dependent, as further weakness in Euro-area indicators and surveys could increase the chances of an official announcement on those fronts and thereby, bring the euro under selling interest. If we were to exploit some short-term euro strength, we would do it against currencies that have been on the back foot lately, like the yen and the dollar, which, as safe havens, came under pressure due to the improved market sentiment.
After yesterday’s strong push to the upside, EUR/JPY broke above its short-term downside line drawn from the high of April 17th. But the pair wasn’t able to stay above its key resistance area at 122.27, marked by the highs of May 30th and June 5th. For now, we will take a cautiously-bullish approach and wait for a break and a close of a 4-hour candle above the 122.27 barrier, before aiming further north.
As mentioned above, if the bulls manage to push the rate above the 122.27 barrier again, and if this time it remains above it, this might attract even more buyers into the field. Such a move might lead EUR/JPY higher, potentially targeting the 122.80 zone, marked near the highs of May 24th and 27th. If that zone is able to temporarily stall the pair, we could see a small throwback. That said, if the rate continues to balance above the aforementioned downside line, we will remain somewhat positive about the short-term outlook. If the buyers manage to lift the pair again and bypass the 122.80 obstacle, the next potential resistance level to watch out for could be the 123.10 hurdle, which marks the intraday swing highs of May 21st and 22nd.
Alternatively, a drop back below the previously-discussed downside resistance line and the 121.75 area, marked by the intraday swing high of June 5th, could spook the bulls from the field in favour of the bears. EUR/JPY may slide further, where it might re-visit the 121.28 hurdle, which is near yesterday’s low. That area could hold, and we may even see a rebound, but as long as the rate continues to trade below that downside resistance line, we will stay sceptical about the short-term upside potential. The pair might drift back down, where a break of the 121.28 obstacle could lead EUR/JPY to the 120.80 support area, marked by the low of June 3rd.
The dollar turned south again versus the majority of its G10 peers. It gained only against JPY and NZD. The greenback underperformed the most against CAD, NOK, EUR and CHF in that order.
Today, USD-traders will be sitting on the edge of their seats in anticipation of the US employment data for May. Non-farm payrolls are expected to have risen 183k, less than April’s 263k, while the unemployment rate is expected to have held steady at its 49.5 – year low of 3.6%. Average hourly earnings are forecast to have accelerated to +0.3% mom from +0.2%, which, barring any deviations to the prior prints, would keep the yoy rate unchanged at 3.2%, as the monthly rate of May 2018 that will drop out of the yearly calculation was also 0.3%.
Overall, the forecasts point to a decent report, in line with further tightening in the US labor market, but bearing in mind the ADP report showed that the private sector added only 27k jobs in May, we believe that the risks surrounding the NFP forecast may be tilted to the downside. Although the ADP is far from a reliable predictor of the NFP number, is the only major gauge we have.
A disappointing NFP print would bring the dollar under selling interest and may prompt investors to add to their already elevated bets with regards to lower US rates by year end. Following the latest escalation in trade tensions, as well as cut hints from several Fed officials, market participants are now more than fully pricing in a 25bps rate decrease for September, while the probability for something like that happening as early as in July is more than 50%. Another cut is factored in for November.
As for the dollar, a weak report is likely to bring it under selling interest. However, the big question is how the equity markets will perform? It may sound strange, but bearing in mind that they’ve been in a rally mode since Monday due to Fed officials’ willingness to cut rates in order to prevent a steep economic downturn, we believe that stock indices could actually gain. A low NFP print would give more reasons to the Fed for hitting the cut button in the months to come.
On May 24th, NZD/USD successfully broke its short-term downside resistance line drawn from the high of March 26th and then headed higher. After a small throwback during the last trading days of May, the bulls regrouped and pushed the rate higher, taking the pair above its 200 EMA on the 4-hour chart, which could be seen a positive sign. But given that, yesterday, NZD/USD failed to establish a new higher high and got held near the 0.6645 level, there is a chance to see a small correction lower, before another leg of buying, hence why we will stay cautiously-bullish for now.
If NZD/USD drifts a bit lower, it may end up testing the above-mentioned 200 EMA again, or even the 0.6575 area, marked by the low of June 4th. If one of them proves to be a good bouncing zone for the pair, the rate might accelerate again, break the aforementioned 0.6645 level and travel towards the next potential strong resistance hurdle, at 0.6685, marked by the high of April 30th.
On the other hand, if the pair suddenly drops below the previously-discussed 0.6575 area, or even the 0.6560 zone, this might attract more sellers again and push the pair lower. We will then examine the possibility of seeing a test of the 0.6526 obstacle, a break of which may lead NZD/USD to the short-term upside line taken from the low of May 23rd.
At the same time the US employment report will be released, we get jobs data for May from Canada as well. The unemployment rate is anticipated to have held steady at 5.7%, while the net change in employment is forecast to show that the economy added just 7.5k jobs during the month, after hitting a record of 106.5k in April. Following a month of record jobs, a small increase thereafter appears more than normal to us. Thus, we don’t expect something like that to alter market expectations over the BoC’s plans. At their latest gathering, last week, Canadian policymakers kept their forward guidance largely unchanged, noting that the degree of accommodation provided by the current rate remains appropriate and that they will remain data dependent in taking future decisions.
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