Dollar Extended Rally Ahead Of Important Job Data

Fed officials sang a chorus to calm markets from concerns of Fed's tapering of asset purchases last week. But the dollar still ended up broadly higher. The greenback's rally against European majors were steady even though momentum was a bit unconvincing in the latter part of the week. Stock markets dived in early part on concerns of lquidity condition in China but subsequent rebound lifted commodity currencies briefly. Though, USD/CAD was back pressing the week's high on Friday while AUD/USD made a new low. Yen's selloff might have resumed towards the end of the week with USD/JPY taking out 99 level again but European yen crosses lagged behind. Markets will enter into an eventful week with a number of important economic data that would trigger adjustment in expectation of the pace of Fed's scaling back of quantitative easing and would probably set the tone for Q3.

Friday's non-farm payroll report from US is particularly important. But before that, there will also be ADP employment, ISM indices and respective employment components. Other events to watch include PMIs from China and UK, employment data and PMI from Canada, Tankan survey from Japan and retail sales from Australia. Of course, RBA and ECB rate decision will be closely watched. BoE rate decision would possibly be a non-event though.

Technically, DOW's rebound didn't warrant completion of recent correction yet as it failed to sustain above 15000 psychological level. US treasury yields turned into consolidation after initial spike and we'd probably see more recovery in bonds in near term. Gold suffered steep sell-off last week and breached 1200 level. Dollar index rose for another week to close at 83.37 but upside momentum was a bit unconvincing. Indeed, the rebound from 80.50 could just be a leg in the consolidation pattern from 84.50. Hence, while further rally is expected in the dollar index, we'd be cautious on topping ahead of 84.50 resistance.

In the currency markets, dollar strength was the major theme. EUR/USD did try to draw support from 1.3 but that didn't last long. Sterling was the weakest European majors, next to Swiss franc as pressured by rebound in EUR/GBP and EUR/CHF. However, it should be noted that EUR/GBP and EUR/CHF were both limited by near term resistance level and pared back much gain before weekly close. Actions among European majors would probably remain directionless in near term. While USD/JPY extended recent rebound, yen's weakness was not confirmed by break of corresponding resistance in EUR/JPY and GBP/JPY. While AUD/USD and USD/CAD consolidated for most part of the weak, the flag pattern in both pair argues that they are resuming recent moves, that is, decline is AUD/USD and USD/CAD. We'd maintained that AUD/CAD has likely bottomed in near term and should either turn sideway or have a rebound.

Our strategy of long USD/CAD was correct last week even though the move was overshadowed by the fall in GBP/USD and EUR/USD. Based on the above analysis, we'd prefer to stay long in USD/CAD this week and short EUR/USD and GBP/USD. Though, as we're aware of risk of topping in dollar index, and with considerations of the event risks, we'd keep our stops tight. That is, we'd keep stops at 1.3150 in EUR/USD, 1.5345 in GBP/USD and 1.0423 and trail the stops as the week goes.