KBC Market Research Desk
KBC Bank
Post-Payrolls dollar decline reverses remarkably
On Friday, the US payrolls report were the only relevant item and markets were confident it would be a strong report. The dollar gained against the euro and the yen. However, the payrolls were really disappointing. US bond yields, equities and the dollar initially all declined substantially. However, the risk-off reaction was temporary and equities rebounded impressively later in the US trading session. The dollar also regained a big part of the post NFP losses. EUR/USD traded temporary north of 1.13, but closed the session at 1.1216 (from 1.1195 on Thursday). USD/JPY ended the session at 119.91, virtually unchanged from Thursday’s close.
Overnight, Asian equity markets are trading positively, as a potential delay in the Fed lift-off is supporting growth in emerging markets. Remarkably, the risk-on rebound in US equities is also visible in some commodities and is supporting commodity currencies. The Canadian, the Australian and the Kiwi dollar are all gaining gradually against the dollar. The picture in the major USD cross rates is less straightforward. The dollar is losing marginally ground against the euro this morning with EUR/USD trading in the 1.1235 area. USD/JPY hardly profits from the risk-on rally and changes hands in the 120 area. Yen traders are in a wait-and-see modus ahead of the BOJ policy statement expected on Wednesday.
Today, the FX focus on the PMI’s/ISM business confidence of the services sector. We don’t expect a substantial revision for the EMU services PMI (preliminary at 54.00) and limited impact on EUR/USD. The consensus expects the US non-manufacturing ISM to decline from 59.00 to 57.5. We see risk for a negative surprise. If so, it might reinforce investor nervousness about a US growth slowdown and add to chances for an Fed rate lift-off in 2015. Initially, such a scenario should be dollar negative as it may lose more interest rate support even as US/German 2-year interest rate differentials have already declined substantially after the payrolls. Regarding the global picture, the jury is still out whether the risk-on rebound can persist in case of more signals of US eco weakness. So, in a day-to-day perspective, we turn more cautious on the dollar even as the reaction of EUR/USD and of USD/JPY on Friday was very limited after all. In a long term perspective, EUR/USD and USD/JPY might see more range trading. A Fed rate hike might be delayed, but such a scenario also raises the chances for more ECB or BOJ easing. In this context, both EUR/USD and USD/JPY might still hold the recent ranges.
From technical point of view, the global picture for the dollar (EUR/USD) hasn’t changed. The dollar rebound ran into resistance just north of the EUR/USD 1.1087 support. but for now EUR/USD is holding the established sideways consolidation pattern. 1.1087/1.1017 is a solid bottom. 1.1460 is a first interim resistance. 1.1714 is the line in the sand. If the policy divergence between the Fed and the ECB would become still less obvious (delay in Fed rate hike expectations), EUR/USD may return toward the topside of this range.
Will good services PMI support sterling?
On Friday, the UK construction PMI printed at a very strong 59.9 (57.5 was expected). Sterling gained a few more ticks against the euro and the dollar after the publication of the release. However, it was again the global market reaction (in the wake of the US payrolls report) that really mattered for sterling trading. Cable jumped from the mid 1.51 area to the 1.5235 area as the dollar was sold. EUR/GBP jumped north of 0.74. However, the risk-off rebound late in the US dealings also reversed most of the intraday moves in the major sterling cross rates. Cable closed the session at 1.5185 (from 1.5131 on Thursday). EUR/GBP ended the week at 0.7382 (from 0.7398 on Thursday).
Today, the UK services PMI is expected to rise from 55.6 to 56.00. The manufacturing PMI and the construction PMI showed a moderate rebound. So, we don’t have a strong reason to take a different view from the consensus. A 56.00 reading would confirm a good momentum in the UK economy. However, the question is whether it will help sterling. Global uncertainty is pushing rate hike expectations for the Fed and the BoE backward. Also keep an eye at the headlines from the Congress of the Conservative party. Signals of a deepening rift on Brexit within the ruling party might be a negative for sterling. From a technical point of view, EUR/GBP is still trading in the upper part of the trading range which is marked by the 0.7423/0.7483 boundaries. The 0.7423 was extensively tested, but no sustain break occurred. Trading north of 0.7483 would deteriorate the sterling short-term picture, which is not our preferred scenario. Even so, partial stop-loss protection on EUR/GBP shorts can still be considered.
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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