Sterling ended last week as the strongest major currency as the Conservatives won 331 seats, more than 50% in the 650 seat parliament and secured a majority. The results were seen as a big surprise to the markets as the election was perceived as one of the closest in years. FTSE staged a strong rebound on Friday to close at 7046.81 and is heading back to record higher of 7122.74. Following Sterling, Aussie was the second strongest major currencies after RBA cut interest rate to new record low 2.00% but omitted the language regarding its bias in the policy statement. Markets perceived that as a sign the easing cycle in Australia is coming to an end. Dollar was generally lower as pressured by weak economic data and the mixed non-farm payroll report provided no support the the greenback. Nonetheless, the greenback's weakness was overwhelmed by the New Zealand dollar which extended recent decline and ended as the weakest major currency.
The job data from Friday showed the US hiring rebounded with healthy momentum, yet growth is certainly insufficient for a June rate hike. DJIA ended at 18191.11 and took out recent range. S&P 500 also closed strongly higher at 2116.1. Both indices are set to retest historical highs this week. Gold had another attempt at 1200 handle but failed again to close at 1187.3. Crude oil extended recent rebound and breached 62 handle but ended at 59.47.
An interesting development is in US yields. 30 year yield, TYX, took out recent resistance at 2.87 and resumed the medium term rebound from 2.226. Further rise would be seen to 3.00 handle first. And break would pave the way for 61.8% retracement of 3.976 to 2.226 at 3.307.
The dollar index extended the pull back from 100.39 and breached key support zone at 94.05/30, 38.2% retracement of 84.47 to 100.39 at 94.30 briefly. But the index sees to be losing some downside momentum after getting support from this zone. We'll still treat the fall from 100.39 as a short term correction as long as 94.05/30 holds. Rebound from the current level, followed by break of 95.94 will affirm this view and turn near term outlook bullish for a test on 100.39. Based on the bullish outlook in US equities and yields, this dollar bullish view remains the preferred scenario. Nonetheless, sustained break of 94.05/30 will indicate that fall from 100.39 is a medium term correction and would head further lower.
Regarding trading strategies, our EUR/GBP long order wasn't filled as the expected retreat earlier in the week was shallower than expected. Meanwhile, the EUR/AUD long was filled and we'll hold on to that position first. Dollar long is the preferred strategy this week based on the above view on the dollar index. Nonetheless, the key is on whether EUR/USD would really reverse from the current level. And, whether USD/JPY would take out 120.50 resistance decisively. We'd avoid selling sterling and it would likely stay firm for a while after the election. USD/CAD would be dependent on crude oil, which should at least have another test on 60 even in case of topping. AUD/USD could get a lift from China's rate cut over the weekend and might strengthen as the week starts. Hence, we'll prefer to sell EUR/USD on break of 1.1065 and buy USD/JPY on break of 120.50. Meanwhile, we'll hold on to EUR/AUD long with stop at 1.39.