In a volatile start to the week, the US dollar looked set to continue where it left off last Friday and extend its gains. However, sour factory data from the US ended its rally abruptly and sent its major rivals spiralling higher.
Last week, after disappointing growth data out of the world’s largest economy, the greenback fell to a three-week low versus the euro. EUR/USD had risen to 1.3062, breaking above the key 1.3000 barrier, but failure to extend gains on Friday led to correction lower and the pair reversed its earlier gains. On Monday, the pair looked like it would continue its downward correction despite better-than-expected manufacturing data from the euro area and its largest economies. It fell to 1.2956 just at the start of the US trading session and looked well on its way to reverse all the gains since Thursday of the previous week.
The Institute for Supply Management reported its manufacturing survey on Monday and sent the dollar crashing. EUR/USD staged a sharp recovery to hit a three-and-a-half-week high by 1.3108. AUD/USD jumped to 0.9792 while USD/JPY plunged to a four-week low by 98.87.
Global equity markets also rallied following the disappointing ISM data from America. First Wall Street closed higher and Asian shares recovered from their lowest in six months overnight on Tuesday. European shares also tracked the overnight rebound.
Data from the eurozone and China also suggested weakness in their respective manufacturing sectors. Despite better PMI readings from the eurozone, Germany and France, the final readings for May still showed a contraction in manufacturing activity. As far as the euro area is concerned this was the 22nd consecutive month of decline.
Chinese manufacturing PMI also slowed as new orders and exports slipped in May. Falling demand suggests the ailing global economy was still in desperate need of stimulus from central banks.
The Nikkei rose more than two per cent after dropping almost four per cent at the start of the week as it continued to experience high volatility. Apart from the sluggish data from the US, news of the Japanese government’s latest public fund strategy also pushed shares higher. On Tuesday, Reuters reported that the Japanese government will urge public pension funds to increase their investment in equities and overseas assets. This strategy, which could be announced as early as this week as part of a growth strategy, aims to boost spending and corporate investment.
USD/JPY rose back above 100 on Tuesday, after dropping to a three-week low by 98.87 on Monday. The pair hit 100.42, lifted by the report on Japan’s proposed growth strategy and spurred by the rally in Japanese shares. Forex investors still didn’t take this news in earnest as they waited until it was announced officially. EUR/JPY also rallied to 131.41 and pulled away from a four-week low of 129.52 on Monday.
The Reserve Bank of Australia left its cash-rate target at 2.75 per cent on Tuesday, as widely expected, but Governor Stevens said the central bank still has room to cut rates further. In a statement following the decision, he said, “The inflation outlook, as currently assessed, may provide scope for further easing, should it be required.” AUD/USD fell to 0.9650 on Tuesday, after jumping to a 10-day high of 0.9792 on Monday.
The market’s main focus this week is undoubtedly the US jobs report to be released on Friday. There was a cautious tone among investors ahead of these data, which could reignite the prospect of the Federal Reserve winding down its asset-buying programme early. Forex traders were however reluctant to take bullish bets on the US dollar following the disappointing ISM data.
Upcoming FX key events
Today: UK BoE interest rate decision and asset purchases target, EZ ECB interest rate decision and news conference. Tomorrow: US change in non-farm payrolls, US unemployment rate and Canadian net change in employment.
Technical key points
EUR/USD is neutral. EUR/GBP is neutral. USD/JPY is bullish, target 105.60, key reversal point 95.80. GBP/USD is neutral. USD/CHF is bullish, target 0.9900, key reversal point 0.9200. AUD/USD is bearish, target 0.9400, key reversal point 0.9930. NZD/USD is bearish, target 0.7500, key reversal point 0.8350.
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Emman Xuereb is a trader at RTFX Ltd.