USD/JPY Pulls Back Above 100.00 As ISM Knee-Jerk Fades

The greenback is attempting a comeback as yesterday’s USD/JPY melt-down looks like it was a run on stops so far. Still, we’ve got a lot of event risks to entertain us through to the end of the week.

Yesterday’s big event was of course the U.S. May ISM Manufacturing survey, which came in at 49.0, the lowest since late 2009 and far worse than 51.0 expected and the 50.7 in April. As I wrote yesterday, the surprise was particularly brutal because it came after a very robust Chicago PMI reading and mixed readings from the other major regional US manufacturing surveys. But already this morning, we’re seeing the market having a hard time holding the knee-jerk reaction with so much of interest still in the pipeline this week – and USDJPY is already back through 100.00 after yesterday’s sub-99.00 reading.

RBA a snoozer...
The RBA was out overnight with very little to say to support the AUD, as Governor Stevens indicated that the subdued inflation outlook provides scope for further easing if necessary. The trading in AUD/USD was rather passive after yesterday’s massive stop-driven backup ahead of the central bank’s meeting. The meeting offers no new input to the overall theme that AUD will remain under pressure due to the outlook for lower rates in Australia and the winding down of the commodity super-cycle, as well as the weak data out of China.

Chart observations
The key overall observation for the moment is that the U.S. dollar is on the ropes after yesterday’s weak ISM survey, which erodes the argument that the Fed is headed for a tapering of its purchases. Let’s recall that the QE3 and QE3+ late last year didn’t do much to harm the U.S. dollar in the first place, so I’m still a bit skeptical that the dollar gets a lot more punishment on the weak data theme, even if all of the rest of the U.S. data this week proves negative.

EUR/USD – The pair settled near the 1.3075 level near the 61.8% retracement Fibo. It’s all about the 1.3000 swing area to the downside, and 1.3100 looks like overhead resistance. We’re not likely to know which was this one is ready to move until post-ECB at earliest and possibly post-US employment data. Still prefer the downside, but we need that reversal.

USD/JPY – creeping back higher above 100.00, the obvious resistance level, as stocks refused to stay down and bonds couldn’t add on to their knee-jerk gains in the wake of the weak U.S. data. If we pull back through 100.00 on a daily close, this would offer the U.S. dollar considerable broad support – though if we ignore psychological levels, the 100.60/80 zone looks more important technically.

EUR/JPY – 130 was critical support, but its break yesterday merely served to trigger stops and failed to hold – the failure to extend is likely due to the lack of follow through in other markets, and the market’s unwillingness to commit until the ECB is in the rear-view mirror. Stay tuned.

GBP/USD – great re-entry levels here for initial cautious shorts, with stop levels above 1.5400, and looking to add if we see a nice pattern reversal back through 1.5240.

Chart: GBPUSD

The GBP/USD needs to find resistance and sell off sharply soon, or we risk the impression that we're stuck in the wider range rather than pressuring 1.5000 for a try lower still.

EUR/GBP – sell-off attempt was interesting, but 0.8500 held – that’s the downside pivot level of note as we look ahead to the ECB/BoE meetings on Thursday. Upside scenario would be strengthened with a close well up through 0.8550, but we need the ECB as a catalyst either way.

EUR/CHF – should rally back into the higher zone today if the USD/JPY below 100.00 can’t hold. Technically, needs to pull back through the 1.2425/50 area to get a smart looking bullish reversal.

USD/CHF – would expect it to directionally imitate the USD/JPY very closely – a sharp snapback rally through 0.9550 would set things up nicely for re-entering longs – otherwise cautious here.

AUDUSD – is the rally already over with? The 0.9680 area looks interesting for triggering a possible immediate test of the lows.

USDCAD – 1.0275-1.0300 looks like a fine area for re-establishing initial longs, looking to add if a rally ensues through the end of this week.

Looking ahead
The HSBC China Non-manufacturing PMI is up tonight – this survey was down at 51.1 in April, and contrasts with the official non-manufacturing PMI reading from yesterday which was at 54.3. Australia’s Q1 growth figures will also print overnight and will receive a lot of focus after the recent story about a shortfall in tax revenues, which suggest a weak economy.

Otherwise, it’s still quite a run through to the end of the week with Services PMI day tomorrow, and a look at the US ADP employment change number, followed by BoE/ECB Thursday and a U.S. employment report Friday.

I’ll preview the ECB a bit more thoroughly tomorrow – but we need to see action from Draghi and company soon. A lack of new policy moves from the ECB risks Europe heading for a deflationary slump that could actually see the Euro continuing to strengthen broadly (regardless of EURUSD direction)– the last thing the Eurozone economy needs.