Dollar Soared On GDP And NFP, While Euro Plummeted On ECB Cut

The US markets were boosted by two important pieces of strong economic data last week, Q3 GDP and the October NFP. The data reignited speculations that Fed would taper the $85b per month asset purchase program in December, rather than in March. Opinions were still quite divided for the moment as some believed that Fed wouldn't have enough evidence on the economy yet by December, and thus, will keep their hands held. Nonetheless, the solid GDP and NFP did at least reinforce the case of March tapering and added some much more certainties to this scenario. The expectations were clearly reflected in treasuries and dollar index. 10 year yield jumped sharply to close at 2.746%, after breaching a near term resistance of 2.757%. That compared to this year's high of 2.984%, made in September. And, it also compared to subsequent low of 2.471% made in October. Similar, 30 year yield rose even more strongly to close at 3.842%. That compared to this year's high of 3.93% made in August and the subsequent low of 3.565% made in October. Dollar index also expected recent rebound from 79..00 to close at 81.30.

Price actions in US stocks were a bit confusing. The DOW suffered initial selloff after the strong economic data on fear that Fed would be starting to withdraw stimulus. But in the end, the DOW staged a strong rebound to close the week at new historical high of 1561.78. The S&P 500 also manage to reverse the post GDP losses to close strongly at 1770.61, just inch below historical close of 1771.95. The reactions showed tremendous confidence in the US economy, which got through sequestration, government shutdown and the prospect of Fed tapering this year. It suggested that investors have strong believe that US economy can withstand Fed's scale back of quantitative easing.

The euro, was on the other hand, heavily pressured by the unexpected rate cut from the ECB. Before the meeting, there were only a minority of economists expecting a cut last week. The majority believed that the ECB would act after getting the latest staff projections in December. So the ECB's cut by 25bps to 0.25% was a big surprise to the markets. More in the ECB Surprisingly Reduces Policy Rate as Deflation Pressure Looms. BoE announce was a non-event with the central bank keeping rates unchanged at 0.50% and held the asset purchase target at the GBP 375b. The RBA left the policy rate unchanged at 2.5%. The central bank noted that economic growth stayed below trend but would pick up next year. More in the RBA Left Cash Rate At 2.5%, warned that the AUD Is "Uncomfortably High".

Technically, sterling was the strongest currency last week as boosted by strong economic data. Dollar was the second strongest. However, strength in the GBP/USD was very unconvincing and the risk of reversal remained high. Euro and swiss franc were clearly the weakest ones. In particular, the EUR/USD has taken out 1.3472 support which now raised the chance of medium term reversal. USD/CHF also took out an important resistance 0.9177 last week which is now gradually shift focus back to 0.9971 medium term top. Commodity currencies were mixed. And the outlook of Aussie and Kiwi will very much depends on emerging Asian stocks performance. In spite of intra-week dip, the EUR/AUD showed sign of bottoming again and the AUD/USD is clearly still bearish in near term. the yen was also mixed especially against the greenback, which showed volatility but lacked direction.

Our strategy of the EUR/USD short was correct last week and the 1.33 target was met. We'll look for opportunity to short EUR/USD again this week with entry between 1.340/345, with target on 1.32. We'd then look at how the pair react to 1.3104 resistance. In addition, we'll try to short the AUD/USD this week as a near term trade for 0.93. However, if the EUR/AUD takes out 1.43 level decisively on a rebound, we'll hold on to the AUD/USD short a bit longer.