KBC Market Research Desk
KBC Bank
Payrolls propel USD beyond key resistance
On Friday, the US payrolls were much stronger than expected. Payrolls increased by 271K, the highest monthly growth this year. Unemployment rate dropped to 5% and wage growth (2.5% Y/Y) accelerated. US bond yields jumped higher as markets embraced the scenario of a December rate hike. EUR/USD dropped from the 1.0870 area to the low 1.07 area, cruising through the 1.0809 support area. USD/JPY jumped decisively beyond the 122 area. EUR/USD closed the session at 1.0741 (from 1.0884 on Thursday). USD/JPY ended the weak at 123.13, up from 121.75.
This morning, the outcome of the US payrolls remained an important factor for trading on Asian markets. Most Asian equity markets excluding Japan and China trade in negative territory. A strong dollar and higher US interest rates are seen a potential negative for funding conditions in emerging markets. Poor Chinese external trade data are a negative, too. Even so, Chinese and Japanese equities rally. The jump in USD/JPY supports Japanese equities. The pair touched a new correction top in the 123.48 area this morning and is trading in the 123.30 area at the moment of writing. Disappointing Chinese trade data support the view that policy stimulation will stay ample for some time to come. Even so, the stronger dollar and poor China data are weighing on commodities and on the commodity currencies. AUD/USD dropped to the 0.7020 area overnight but is rebounding slightly. EUR/USD shows a similar picture. EUR/USD is off Friday’s post-payrolls lows and trades currently in the 1.0765/70 area.
Today, there are only second tier eco data on the agenda in Europe. The eco calendar in the US is even empty. The OECD will give its economic outlook, but we don’t expect really strong guidance for global currency trading. Fed’s Rosengren (a dove) will speak on the US economy. He will probably join the campaign to convince markets that normalisation process will develop in a very gradual way. We also look out for comments from ECB members. How tough will they talk on further easing? The ECB will probably be happy with the course of events on the currency market. However, they probably won’t push for an accelerated decline of the euro from current levels.
In a day-today, we expect consolidation, both in EUR/USD and in USD/JPY in the wake of Friday’s strong USD gains. For now, we still don’t see a trigger to really row against the tide.
In a broader perspective, the dollar has strengthened recently against the euro and the yen. Interest rate differential at the short end widened in favour of the dollar. EUR/USD dropped below the key 1.0809 support and also reached the targets of the multiple top formation (neckline 1.1087/1.1105) in the low 1.0715 area. With policy divergence between the Fed and the ECB (and to a lesser extent also the BoE) still in place, we don’t row against the USD uptrend.
However, quite some good (interest rate) news might already be discounted. So, the pace of the USD rally might slow. The post QE lows in EUR/USD 1.0521/1.0458 area are the most obvious targets on the EUR/USD charts. We hold on to a EUR/USD sell-on upticks strategy for a retest of the cycle lows. For USD/JPY, the cycle tops in the 125.28/86 area come on the radar.
Sterling shows mixed picture post US payrolls
On Friday morning, sterling remained under pressure against euro and dollar. Follow through selling after Thursday’s dovish BoE message dominated. The UK eco data were okay. The trade deficit narrowed in September. Industrial production was a tad weaker (-0.2% M/M/ 1.1% Y/Y) than expected, but the cyclical manufacturing output slightly exceeded expectations. EUR/GBP went a few ticks lower, but immediately sterling was sold. In the afternoon, sterling fought back when EUR/GBP failed to take out the 0.72 resistance .After the strong payrolls, EUR/USD underperformed cable and EUR/GBP dropped to 0.7110/20 area. The pair closed the session at 0.7137 (from 0.7156). Cable still ceded a lot of ground after the payrolls. The pair closed the session at 1.5053 (from 1.5208).
Today, there are no important eco data on the agenda. So, EUR/GBP and cable might enter calmer waters. The UK labour market report, expected on Wednesday, will be key for sterling trading this week. Will a strong/decent report bring a BoE rate hike again on the radar? Looking at the broader picture, the soft tone at the ECB press conference pushed EUR/GBP again lower in the longstanding sideways range. The pair tested the 0.7196 support and the level was ‘really’ broken after the FOMC announcement. A retest occurred last week, but the test was rejected. We maintain a sell-on-upticks approach for EUR/GBP.
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.
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