Mayday for the Buck?

05/05/2015 9:00 am EST

Focus: FOREX

Though Tokyo and London markets were closed for bank holidays on Monday, Scott Smith, of Cambridge Mercantile Group, still studies three major currency pairs and shares his outlook for the rest of this potentially pivotal week for the currency markets.

With both Tokyo and London markets closed for bank holidays on Monday morning, what could potentially be a pivotal week for currency markets has started off in relatively subdued fashion, with the greenback on firmer footing as the euro makes up for its absence in the big dollar’s recovery at the end of last week.  Despite the final manufacturing PMI reading for the EuroZone in April coming in slightly better than the initial flash estimates, the common currency’s inability to rally past the 100-day moving average against the greenback last week has EUR/USD emanating a distinct other tone Monday morning, with the pair edging back into the mid-1.11s. Reform negotiations in Greece have been reported as finally gaining some traction in the aftermath of the cabinet shake-up and changes to the negotiating team, which has helped spreads between Greek and German debt tighten considerably Monday morning, though the renewed optimism has yet to filter through to the euro.

The US Dollar Index is building on last Friday’s bounce due to the softness in the euro, but it will be this Friday’s Non-Farm Payrolls that will be pivotal for the USD moving forward.  Strong job gains in April would strengthen the USD bull camp that the March report was an aberration, and Q1 GDP has followed a cyclical pattern of below trend growth, only to snap back and pick-up steam in future quarters.  A soft employment report would shake market confidence and increase the likelihood growth in subsequent quarters of 2015 will have a hard time picking up the slack created by the stall-speed growth in the first quarter and reinforce the challenges the Fed will have in finding an opportunity to hike rates before the end of the year. The reverberations felt throughout currency markets should a large deviation outside of the median analyst expectation occur could be substantial, so make sure to speak to your dealing teams leading up to the announcement as how best to position preceding what has the potential to be a volatile conclusion to the week.

Over in Asia, the concern China might be faced with a prominent slowdown in economic activity was bolstered with the final HSBC manufacturing PMI Sunday night, which came in well below expectations of 49.4 and printed at 48.9.  The deterioration in the Chinese economy has prompted further calls for greater measures of accommodative monetary policy, which helped the Shanghai Comp finish its session in the black by 0.9%, but kept pressure on Antipodean currencies throughout the overnight session.  After being unable to sustain a break of the 0.80 level against the USD last week, the Aussie has been under pressure leading into Monday night’s monetary policy decision from the Reserve Bank of Australia, where markets are discounting close to an 80% chance of a 25 basis point cut.  The better than expected building approvals there were released overnight have not been able to turn the tide when combined with the disappointing Chinese PMI figures, with the Antipodean currency sliding into the low 0.78s ahead of the North American open.   We would caution that since the last RBA meeting, the data has been relatively positive towards domestic developments and the majority of the sentiment towards an additional rate cut comes in the form of betting Governor Stevens and the RBA are getting nervous with the level of AUD/USD, hoping to beat the pair back down in order to improve the country’s terms of trade.  With bearish sentiment building ahead of Monday night’s decision we see the bigger risk as being another decision to keep rates on hold, as the short Aussie position could be susceptible to a quick unwind.

As we get set for the opening bell in North America, consolidation is the name of the game as traders and market participants await a fairly robust economic calendar towards the end of the week.  Light sweet crude has managed to claw back some of the losses it experienced near the end of last week, with the front month WTI contract finding bids north of the $59 level.  The positive price action in Texas Tea has allowed the loonie to rebound after Friday’s short squeeze in USD/CAD, with the commodity-linked currency shrugging off the poor Chinese PMI data and propelling the pair back to pivot around the 1.21 level.

By Scott Smith, Senior Forex Trader, Cambridge Mercantile Group

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