Dollar weathers poor payrolls quite well

On Friday, currency traders digested the post-ECB sharp euro sell-off and coped with a disappointing US payrolls report. It helped EUR/USD to regain part of Thursday’s losses, but the pair stayed well below the 1.30 barrier. USD/JPY touched a six yr high in the morning, but dropped back below the 105 barrier after the weak payrolls. Even so, the technical picture of EUR/USD and USD/JPY remains dollar bullish. Therefore, we consider the setback for the dollar as a correction on the recent dollar uptrend/euro downtrend.

Overnight, China reported a record trade deficit based on strong export growth. Asian equities show moderate gains (Chinese markets are closed). The dollar is holding fairly strong despite Friday’s poor US payrolls. USD/JPY tries again to regain the 105 mark. EUR/USD trades currently in the 1.2940 area. So, the 1.2920 correction low is again within reach.

Today, there are only some second tier eco data on the agenda in the US and in Europe. So, technical considerations will probably prevail. The ceasefire in Ukraine was a positive for European equities and for the euro on late on Friday. However, the developments this weekend showed that this ceasefire is very fragile. So, we look out whether it becomes again a source of uncertainty and whether there is some kind of a pay-back reaction in European equities and the euro. We don’t expect a big reaction, but new headlines on tensions in Ukraine might be an additional element to cap the topside in the euro.

The payrolls were a disappointment and the dollar lost interest rate support against the euro, especially at the short end of the curve. Even so, the correction in EUR/USD and USD/JPY didn’t touch any important technical level. The overall picture remains USD-positive and euro negative.

USD/JPY is still within reach of the range top at 105.44, which was already tested on Friday morning. A sustained break beyond the 105.44 range top could herald the start of a new upleg. The payrolls slightly eased the positive momentum in this cross rate. Even so, we have the impression that better US data in the near future can still push the pair higher. At the same time the yen remains in the defensive too as markets still see a decent chance of more BOJ easing further down the road. We maintain a cautiously positive bias on USD/JPY.

The technical picture of EUR/USD deteriorated substantially after Thursday’s break below the key 1.3105 level (Sept 2013 low). This level now becomes a new resistance that we think will be difficult to regain. The negative deposit rate is a structural negative for the euro. In a longer term perspective, the EUR/USD downtrend is confirmed. 1.2755/1.2662 is the next key support on the charts. A more pronounced correction (EUR/USD rebound), if any, is still an opportunity to add EUR/USD short exposure.

Scotland polls put sterling again under pressure

On Friday, there was hardly any specific news from the UK to guide sterling trading. So, trading in EUR/GBP and cable was driven by the overall performance of the euro and the dollar. EUR/GBP regained some ground in line with the broader rebound of the euro. However, the rebound had no strong legs despite constructive headlines from Minsk on the crisis in Ukraine. Cable underperformed EUR/USD and basically held a sideways trading range in the low 1.63 area, indicating ongoing underlying sterling weakness.

During the weekend, a first opinion poll showed a majority of the respondents in favour of Scottish independence. So, tough negotiations with the UK on separation are becoming a real possibility. The three major parties in the British parliament already said they wouldn’t agree to an independent Scotland continuing to share the pound as official currency. Sterling is again under pressure this morning and is hovering near the 0.80 barrier. Cable extends its sell-off and lost other big figure trading below the 1.62 barrier this morning.

Later today, the Halifax housing data will be published, but the focus of currency traders has now clearly moved away from the data towards the outcome of next week’s referendum on Scottish independence.

Uncertainty on the referendum after the recent opinion polls also made us change our ST bias on sterling. There is a substantial risk that this issue will keep sterling investors side-lined until it is out of the way. The recent tentative signs of a bottoming out in sterling (or even a rebound) will probably not materialize in the near future. We removed our sell-on-upticks bias for EUR/GBP and installed stop loss protection on GBP-longs (both against USD and EUR). The euro decline after the ECB decision last week didn’t change our view. We avoid sterling long exposure short-term.