Yesterday saw a further aggravated sell-off in European bonds, but at least a temporary bottom was found right near the 1.00% yield level in German bunds before a rally set in that took yields back below the previous day’s close, allowing EURUSD to finally find a ceiling and ease back lower after rallying above 1.1350 at one point yesterday.
Further signs of relief and stability in European bond markets will likely allow the euro consolidation to continue. The uncertainty is whether the turmoil is over or whether it extends for a while.
Meanwhile, Greece exercised its option to delay today’s payment to the IMF after the latter extended the option to roll together its payments due this month to the end of the month and the latest noises from the creditors’ side point to little or no progress on the negotiations.
The USD, meanwhile, is relatively resilient in the background, outside of the spike in EURUSD as we look toward today’s important employment report as the next key “incoming data” input. The Fed’s Tarullo was out fretting the quality of the US recovery and whether there was something worse afoot in the weak Q1 numbers than the factors attributed to causing the slump (weather, port strike and seasonality).
We are leaning for an inline change in nonfarm payrolls print (the usual approx. 220,000 is expected) though I suspect the risk is for an upside surprise, which could generate significant further upside for the USD, especially in EURUSD if European bond markets are calming, but certainly elsewhere in other USD pairs.
And remember to keep one eye on the trend in US earnings growth, which is at least half of the story from here on the timing and steepness of Fed rate hikes to come (market is extremely complacent here…) . A +300,000 print and average hourly earnings above 2.3% (2.2% is expected and 2.3% is the highest print since 2009, so 2.4% or higher would look very significant) might blow the doors off this market, though anything above 250,000 on payrolls with positive revisions and earnings growth at 2.3% with a better-than-expected month-on-month number (0.2% expected) would look very USD supportive.
EURUSD
EURUSD has been more about the squeeze on short euro positions this week rather than any notable weakness in the USD and today sees potential significant volatility for both currencies. Technically, the pair needs to plunge all the way back through the 1.1065/1.1000 area to signal that this entire squeeze episode is over and we can get back to discussing parity.
Meanwhile, further bond market turmoil in Europe in the near term and/or a particularly ugly US employment report today (not expected) could mean interaction with the 1.1500 area and even the 200-day moving average up above 1.1750, though these levels look like quite a stretch at this point in time and the risk points more toward a sudden collapse back into the low range if USD strong and bad nerves in Europe calm.
The G-10 rundown
USD: waiting US data as indicated above – generally looking resilient and waiting to add EURUSD to the bullish USD story if the euro squeeze shows further signs of fading on bond market volatility easing.
EUR: All about positioning and whether we are getting to the other side of the bond market turmoil – suspect we are nearer the end than the beginning of that phenomenon in the big picture.
JPY: trading on a very weak footing since the big break in USDJPY above 122.00. Any extra-strength data from the US today (or severe disappointments) should be felt strongly here.
GBP: Trading passively in the background and will likely trade like a low beta US dollar against the euro, if the euro squeeze is fading and the US employment report comes in strong today (i.e., GBP up versus EUR, but down vs. USD)
CHF: Still reactive to Greek news but also the general squeeze in euro and suspect in the longer run that the upside in EURCHF remains the side of least resistance (with or without the euro bond market turmoil) once we get to the other side of a deal for Greece.
AUD: Horrible trade report pressuring AUD a bit, and interesting to see today whether a strong US employment report can force a full rejection of the recent RBA-inspired rally and put the focus back on the lows for the cycle and beyond.
CAD: weak oil prices pressuring CAD and we have the double whammy of the US and Canadian jobs reports today. Continue to focus on a test of the cycle highs above 1.2800 and an eventual test of the huge 1.3000 area.
NZD: Interesting that fresh highs in AUDNZD didn’t hold – watching whether the coming days confirm that development as we face a bout of range trading for that pair. In NZDUSD, the focus is on maintaining the validity of the recent break below the 0.7200/0.7175 zone.
SEK: EURSEK easing back lower in sympathy with the euro consolidation. We haven’t had sustained direction here since March.
NOK: Little relief in EURNOK despite the euro easing back elsewhere, as the focus is on the oil price sell-off. A couple of interesting data points up today and the Norges Bank regional network report (somewhat akin to Fed beige book), which could shift the market’s expectations for Norges Bank (high risk of this eventually ahead of/at Norges Bank June 19 meeting) and maintaining a bias for a weak NOK. (EURNOK to test 9.00?).
Upcoming Economic Calendar Highlights (all times GMT)
- Norway Apr. industrial Production Manufacturing (0800)
- Norway Norges Bank Regional Network Report (0800)
- US May Change in Nonfarm Payrolls (1230)
- US May Unemployment Rate (1230)
- US May Average Hourly Earnings and Average Weekly Hours (1230)
- Canada May Unemployment Rate and Net Change in Employment (1230)