Last Friday’s New York session can be characterised by three specific events: A strong US Payroll report, a “dovish” interpretation of Fed Chairman Jerome Powell’s policy comments and a 100 basis point reduction in the Chinese reserve rate requirement (RRR).
The US Payroll data printed much higher than expected with the headline number showing 312,000 new jobs created in November versus expectations of 180,000. This was a 10-month high for monthly new job creation. Weekly wages rose .4% versus a .3% consensus, while the slight rise in the unemployment rate to 3.9% was offset by the rise in the participation rate.
The strength of this report tempered the notion that the FED may have to lower rates this year and Forex traders bought the USD rallied accordingly.
At about noon NY time, news hit the wires that the Peoples Bank of China (PBoC) had lowered their RRR by 100 basis points, which frees up about $110 billion in cash into the banking system.
Shortly there after, Fed chief, Jerome Powell commented that the Fed was “listening to the market” and that “Fed policy will remain flexible.” throughout 2019.
The combination of these headlines sparked a wave of “Risk On” sentiment in financial markets which saw the US stock indexes post triple digit gains, and G-7 stock index futures rise 1% to 2% into the weekend.
The overall impact on the USD was mixed as the Greenback recovered smartly against the JPY, lost ground against the Aussie Dollar and finished the session pretty much unchanged against the Euro.
Looking ahead, we don’t expect Friday’s price action to materially change the trends we have seen over the last two months. We imagine it was fairly easy for Mr Powell to take a cautious tone about data dependency after the robust employment report and wage growth pushing up against five-year highs.
With respect to the PBoC action, Friday’s announcement was somewhat expected since the Lunar New Year holiday is less than a month away and banks will be closed for several days. Furthermore, the PBoC cut the RRR four times in 2018. During that same time, the Benchmark China A-50 Index lost over 30% of its value.
On balance, we see scope for the USD to soften in the near-term but prefer to use this pullback to scale into longer-term bullish USD positions.
The Aussie dollar rebounded off the 10-year low of .6740 posted on Thursday and has pushed up against the 30-day moving average near .7160. There were no first-tier reports out last week but this week will include the November trade balance tomorrow and Retail Sales on Friday.
December’s weaker data stream has prompted several domestic banks to call on the RBA to lower the overnight lending rate sometime this year. As such, we see scope for weaker data this week to push the pair back into the .7000 handle. Our trade suggestion to sell into the .7070 area was filled. We suggest medium-term traders can add to short positions at .7165 with an initial target of .6920 and a .7245 stop.
The EUR/USD avoided an outside reversal week by closing above 1.1355. The “risk on” relief rally was supportive of the single currency but the dominate technical flag pattern is keeping the range between 1.1220 and 1.1500. Our current short position is from 1.1447. We suggest adding to short positions at 1.1480 with an initial target of 1.1220 and a 1.1580 stop.
Like the Aussie, the Sterling snapped back from a significant low of 1.2390 and is now above the 30-day moving average of 1.2670. The technical picture is favourable for a move back into the resistance area of 1.2810 to 25. We are currently flat the GBP/USD and suggest selling at 1.2810 with an initial target of 1.2480 and a 1.2945 stop.
There were several market reports over the weekend questioning why the Japanese Ministry of Finance (MoF) didn’t respond with BoJ intervention during last week’s 400-point plunge in the USD/JPY. The simple answer is that the 1.0400 level is not a significant barrier for the MoF and they will likely keep their intervention target closer to 100.00.
The technical picture looks very weak with the current price of 108.20 a full 300 points below the 30-day moving average. With the daily RSI deeply oversold, suggest short-term traders can look to buy the USD/JPY at 106.80 with an initial target of 109.60 and a 105.80 stop.
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