- Solid US jobs report sparked USD rally, with big move in EURUSD
- USD's new-found strength could be bears pulling back rather than trend change
- For EURUSD 1.20 is line in the sand, while 1.1500/1.1450 is first pivotal area lower
- US rates responded to jobs report and will be in focus this week
- ZAR risk focuses on confidence vote in persident Jacob Zuma
- RBNZ meeting on Thursday could decide NZD's fate vs USD, AUD, CAD
Base case is for EURUSD to be sideways this week. Image: Shutterstock
By John J Hardy
Friday's US jobs report was solid, if not spectacular, but the data were probably less important than the fact that the US dollar has run very far and very fast to the downside and it may be a case of USD bears reining in positioning rather than any sea change in the outlook.
Still, US rates did respond smartly on Friday to the jobs report and will be a key focus this week and beyond as the weak USD has become a driver of enthusiasm for global risk appetite, and higher US rates could challenge this theme. We’re unlikely to see any fundamentally supportive developments on that front today, with the two most dovish, non-voting Federal Open Market Committee members, St. Louis Fed president James Bullard and Minneapolis Fed president Neel Kashkari, speaking.
The economic calendar this week is sparsely populated with events of note. There is plenty of intense drama in the South African rand, however, surrounding a confidence vote in president Jacob Zuma early this week, with an announcement today on whether the ballot will be secret (suggesting higher odds of a no-confidence vote carrying the day). A Zuma exit is seen as key for turning the tide for the underperforming rand.
Elsewhere, the most pivotal event for any single G10 currency is the Reserve Bank of New Zealand meeting on Thursday, which potentially decides the fate of the NZD versus the USD and AUD, but also CAD, as NZDCAD has long been a favoured expression for kiwi downside potential. We doubt the RBNZ has anything on offer to excite further support for an overvalued kiwi, with the policy outlook on ice until 2019. For AUDNZD, the 1.0850 level is a prominent pivot, and a break would be the biggest technical trigger since the big rally in the first quarter that faltered above 1.1000. For NZDUSD, a dive back through 0.7350-00 would neutralise the recent bullish move and represent a technical cap for the chart.
Technically speaking, we can point to a number of interesting inflection points in key USD pairs, both on the resistance and support side this week that look structurally pivotal, including:
EURUSD: to the upside, the 1.2000 area is massive and will be the next line in the sand for the pair. Our base case is that this week will be sideways at best for EURUSD, so not likely to come into play just yet. To the downside, there is tremendous room for consolidation without threatening the massive rally from the 1.0600 base. 1.1500/1.1450 is the first pivotal area lower.
USDJPY: 110.00 is the obvious local support, and the pop in US bond yields leaves us suspecting that risk this week is to the upside, where the Ichimoku cloud levels start in the mid-111.00s and head higher as the week progresses.
USDCAD: the pair has made a stand in the 1.2500 area and could range as high as the first major Fibonacci level at 1.2920 or even the round 1.3000 level, which was pivotal on the way down and earlier this year.
AUDUSD: 0.8000 was the stumbling block, and the trend support looks like 0.7750-0.7800
EURUSD rally falters
The EURUSD rally faltered at the 200-week moving average. It may finally be time for consolidation after the brutal run higher after the French elections. The move has extended so far that the pair can easily afford a consolidation of 2-3 more figures without running into major trend supports.
The G-10 rundown
USD – mostly technical focus this week and on whether US rates will support a decent consolidation after the recent run lower. EURUSD is likely the highest beta pair.
EUR – it’s not about the fundamentals today, but about the ebb and flow of positioning as the recent steepness of the rally may have been driven by a fear of missing out. There's plenty of room for consolidation in EURUSD without major technical implications.
JPY – he yen has been weak recently, though less weak than the US dollar. If US bonds weaken, the yen could as well.
GBP – The dovish Bank of England has set the tone. 0.9000 is the key tactical pivot for EURGBP, and GBPUSD is pivotal in the 1.3050-00 area, which needs to survive or the rally looks finished. Rumours are swirling on whether the UK ready is to pay rather large Brexit divorce bill.
CHF – EURCHF corrected together with other euro crosses. We’ll have a look at the nature of the consolidation and whether the Swiss National Bank sight deposits can ever begin to wind down rather than merely stop growing to judge whether there is potential to 1.2000 eventually.
AUD – strong commodity prices are supportive – but perhaps more in AUDNZD this week rather than AUDUSD?
CAD – CAD has plenty of room to consolidate – we focus on 1.2920 as a first step after the 1300+ pip run down from 1.3800 to below 1.2500.
NZD – this should prove a high volatility week for the kiwi – with two-way risk over the RBNZ meeting, though we suspect the side of least resistance is lower, as discussed above.
SEK – traders are struggling for a catalyst, but the side of least resistance, barring new information, looks lower for EURSEK on valuation, as long as it remains below the 9.65 aera.
NOK – not impressed with NOK, as EURNOK has been unable to mimic other euro pairs. The weak Norway rate outlook may be weighing as we await a new CPI on Thursday (Norway’s CPI has plunged from 4% to 1.4% since mid-2016).
— Edited by John Acher