Global equity markets rallied at the start of the week dampening demand for safe-haven assets. The yen slipped for the third consecutive day on Tuesday versus the dollar on signs that tensions between Russia and Ukraine were abating.
Investor risk sentiment improved with the easing tensions in Ukraine and strong corporate earnings helped boost appetite for riskier assets. In an e-mailed statement, the Kremlin announced that Vladimir Putin had agreed on the need of more talks over Ukraine.
The dollar edged higher against the yen overnight on Tuesday, after the Dow Jones and S&P 500 closed at record highs on Monday. The Japanese currency then declined further as Asian shares followed and the Nikkei closed almost 2 per cent higher. European shares continued the trend on Tuesday with a key index touching a six-year high, lifted by upbeat earnings from blue-chip companies.
The Dollar Index (DXY) rose to a five-week high at 80.088 by the time of writing, after touching its lowest since September 2012 at 79.093 on May 7. USD/JPY rose to 102.36 on Tuesday. With investors beginning to shrug off concerns over Ukraine and emerging markets, the yen may continue to be put under pressure, as traders look to put on carry positions using low-yielding currencies to fund them. As policies diverge, with the Federal Reserve now well into its tapering regime, while the Bank of Japan remains vigilant on standby, the USD/JPY pair should be well supported over the near to medium term.
As long as the 101.00/40 level holds, a successful break of key resistance by 103.00, may pave the way for more gains towards a four-month high of 104.13. Other yen crosses are also in a bullish trend over the last few weeks. AUD/JPY rose to 95.78 from a two-month trough by 94.26 on May 5.
The pair should extend its rally to attempt a break of 96.51, this year’s high. Despite the weakness in the yen however, the euro could not capitalise given the single currency’s own woes after last week’s European Central Bank meeting. EUR/JPY is expected to trade sideways in the near term.
The euro seems to have ended its multi-month bullish run with Mario Draghi’s press conference last week. The single currency touched its highest since November 2011, at 1.3994 against the dollar, after the ECB decided to stay on hold yet again this month. As president Draghi spoke of policy action to be very likely taken next month, the single currency plummeted across the board. EUR/USD dropped to 1.3745 by Friday of last week, and EUR/JPY plunged to 139.89 from 142.37, hit at the start of Draghi’s conference. EUR/GBP was also under pressure, and continues to trade lower, falling to 0.8138 by Tuesday afternoon.
EUR/USD extended its decline on Tuesday, after a German sentiment survey showed a steep decline in analysts’ expectations on the economy. The ZEW survey expectations index fell to 33.1 in May from 43.2 the previous month and well below the consensus for 40.0. The pair slipped to 1.3699 on Tuesday and looked to extend its decline further, especially with market expectations shifting predominantly towards more stimulus by the ECB.
Over the next few weeks, we may see the market price-in an intervention by European policymakers. Therefore the single currency should remain under pressure until the ECB unveils its next policy move. EUR/USD should trade lower towards the mid 1.36 levels initially. Further to the downside, more significant support is found between 1.3530 and the 2014 low by 1.3477. Another “no show” by Draghi in June could lead the single currency soaring higher well above 1.40. In the near term, despite a bearish outlook, traders should be wary that the market may attempt to push the pair higher again to once again test Draghi’s resolve. But the latter scenario is more unlikely now that the ECB chief has shown his cards in this month’s meeting.
The Aussie again outperformed most of its major rivals last week after a strong jobs report from down under for the month of April. The Australian economy produced 14,200 new jobs last month as the jobless rate fell to 5.8 per cent. Meanwhile the Reserve Bank of Australia kept its benchmark rates unchanged. AUD/USD rallied to 0.9394 last week, and is hovering near this level so far this week. As forex investors appear to be favouring higher-yielding currencies, the Aussie and other riskier currencies like the kiwi should be well in demand. Thus AUD/USD should rise higher and test the calendar year high by 0.9461 in the near term.
Upcoming FX key events:
Today: German GDP, EZ GDP, US CPI & US Philly Fed Index.
Tomorrow: EZ trade balance, US housing starts & US preliminary Michigan consumer sentiment.
Technical Key points:
EUR/USD is bearish, target 1.3470, key reversal point 1.3900. EUR/GBP is bearish, target 0.8080, key reversal point 0.8250. USD/JPY is bullish, target 105.50, key reversal point 101. GBP/USD is bullish, target 1.7060, key reversal point 1.6450. USD/CHF is neutral. AUD/USD is bullish, target 0.9540, key reversal point 0.8900. NZD/USD is bullish, target 0.8850, key reversal point 0.8400.
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Emman Xuereb is a trader at RTFX Ltd.