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USD choppy ahead of May Non-Farm Payrolls report

Erik June 5th, 2020

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SUMMARY

 

  • More USD longs stopped out in early European trade after quiet Asian session.
  • Traders are expecting 8M jobs lost in the US, jump in the unemployment rate to 19.7%.
  • Canadian Employment Reports expected to show -500k jobs, 15.% unemployment rate.
  • Downside chart gap from March + huge option expiry in play for USDCAD this morning.
  • EURUSD screams to 1.1360/70s after traders ultimately celebrate ECB’s 600bln PEPP increase.
  • EU’s Barnier and UK’s Frost say no progress in this week’s Brexit talks.  GBP unphased.
  • Continued rise in US yields lead risk sentiment higher, helping positive USDJPY correlation return.

ANALYSIS

USDCAD

The broader USD extended its decline in early European trade this morning and, while we think yesterday’s ECB-driven surge in risk sentiment is still fresh on trader minds, we believe the market also cruelly stopped out some remaining USD longs who hoped that today’s Non-Farm Payrolls report could rescue their positions.  This “stop-out” dynamic makes sense to us especially considering the technical support levels that were broken for the USD across the board this morning…but then were quickly regained.  Some traders are citing the Chinese foreign ministry’s headline this morning about how it “vows countermeasures against the US list on 33 entities” as the reason behind the USD’s bounce over the last few hours, but their statement lacked detail and sounded very similar to earlier vague threats…and so we’re more inclined to chalk up the overnight price action to pre-NFP re-positioning.

 

Traders are expecting 8M jobs lost versus 20.5M in April, and a jump in the unemployment rate to 19.7%, when the US reports its May Non-Farm Payrolls report at 8:30amET.  Canada will also report its official employment statistics for the month of May at the same time, with market participants expecting 500k jobs lost versus 1.9M in April, and a rise in the unemployment rate to 15.0%.

 

Dollar/CAD is currently trading just above chart support in the 1.3460-80s.  There is an un-filled chart gap below the market right now, from 1.34389 to 1.34595, which could become a target for prices.  Recall this was from that weekend in March where Saudi Arabia sparked a brief oil price war with Russia.  Hedging around this morning’s looming USDCAD 1.3500 option expiry at 10amET could also force spot prices to magnetize around the figure considering the notional amount coming off the board has swelled to 2.2blnUSD. 

 

USDCAD DAILY

USDCAD DAILY

USDCAD HOURLY

USDCAD HOURLY

JULY CRUDE OIL DAILY

JULY CRUDE OIL DAILY


EURUSD

It turns out that the trader angst we witnessed briefly going into Christine Lagarde’s press conference yesterday was unwarranted.  The ECB President didn’t drop any seriously negative bombshells on the marketplace, and so we think traders felt they had the “all clear” to keep piling on risk-on trades following the central bank’s earlier announcement of a larger than expected increase to its Pandemic Emergency Purchase Program.  We also believe that significant technical breakouts for EURUSD (above 1.1260) and the US 10yr yield (above 0.76%) added fuel to the euro’s ferocious rally yesterday.        

 

The euro/dollar rally extended all the way to the 1.1360s yesterday, which was the next logical target for prices considering it was the next major chart resistance level.  The market put the screws to some USD-long holdouts this morning by inching prices slightly above there to trend-line extension resistance in the 1.1370s, and it has now pulled back as the US NFP report looms.

 

There’s much chatter in the marketplace this morning about the EURUSD market being technically over-extended at this point, after trading up 8 days in a row since it breakout above the 1.0990s.  Some are worrying too that options market doesn’t believe the move, by virtue of EUR calls not becoming increasingly more expensive vis a vis EUR puts (1-month EURUSD risk reversal not rising).  Reuters reported on a massive vanilla call buyer at the 1.1750 strike this morning however; for 1.1blnEUR notional paid!  How about that for upside conviction!


EURUSD DAILY

EURUSD DAILY

EURUSD HOURLY

EURUSD HOURLY

BTP/BUND YIELD SPREAD DAILY

BTP/BUND YIELD SPREAD DAILY


GBPUSD

The euro/dollar’s explosive rally ultimately helped sterling regain the 1.2570s yesterday and, while the 1.2610s proved as stubborn resistance for GBPUSD from the NY afternoon trade to the Asian close last night, the market got a chance to break higher again this morning amid some broad USD selling.  It felt like a pre-NFP run on stop orders from USD longs more broadly though, as we mentioned above, and so that’s why we think GBPUSD soon retreated.

 

The market is now holding the 1.2610s as new chart support as traders digest another depressing weekly update from the EU’s chief Brexit negotiator Michel Barnier.  He said there are been no progress on talks regarding the fisheries and level played field issues and that “we cannot go on like this forever”.  The UK’s David Frost spoke shortly thereafter; affirmed the UK’s position on these two issues, and confirmed Barnier’s comments by saying that progress has been “limited” and that “we are close to reaching the limits of what we can achieve through the format of remote formal rounds”.  We can understand GBPUSD’s malaise ahead of the upcoming NFP report at 8:30amET, but we’re quite dumbfounded why EURGBP can’t rally on this negative news.


GBPUSD DAILY

GBPUSD DAILY

GBPUSD HOURLY

GBPUSD HOURLY

EURGBP DAILY

EURGBP DAILY

AUDUSD

The Australian dollar managed to record a mediocre NY close yesterday.  The surge in EURUSD helped AUDUSD traders ultimately defend the 0.6860-0.6880 support zone but the post-London pullback off the 0.6980s resistance level wasn’t anything to celebrate.  This morning’s wave of USD selling in early Europe trade saw the Aussie briefly rally above the 0.6980s, however this move has now largely reversed ahead of the US payrolls number.  Overnight ATM option straddle pricing is predicting a 70pt range of volatility for today’s NY session, slightly higher than the 50pt range it forecast ahead of last month’s NFP report.

 

AUDUSD DAILY

AUDUSD DAILY

AUDUSD HOURLY

AUDUSD HOURLY

USDCNH DAILY

USDCNH DAILY


USDJPY

The rally in the US 10yr yield continues to lead broad risk sentiment higher ahead of this morning’s Non-Farm Payrolls report.  The US bond market has awoken from its sideways slumber for the better part of April and May, and has now feverishly been putting on yield-curve steepener trades since the start of June.  There’s some debate as to whether interest rate traders are finally accepting the V-shaped recovery Kool-Aid that the stock traders have been drinking or whether they’re simply responding to the increasing amount of new US issuance (supply), but these moves have been hard to ignore this week and are quickly restoring USDJPY’s traditional positive correlation with risk sentiment.

 

Dollar/yen rallied to the 109.30s resistance level overnight after re-breaking above the 108.90s with the yield rally yesterday, and it has since pulled back a bit now ahead of the NFPs.  Over 1blnUSD in options expire at the 108.80 strike this morning, which could prove as a magnetic target for spot USDJPY prices should the US numbers disappoint.


USDJPY DAILY

USDJPY DAILY

USDJPY HOURLY

USDJPY HOURLY

US 10-YR YIELD DAILY

US 10YR YIELD DAILY

Charts: Reuters Eikon

 


About the Author

Erik Bregar Director, Head of FX Strategy at Exchange Bank of Canada

Erik Bregar - Director, Head of FX Strategy

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Erik works with corporations and institutions to help them better navigate the currency markets. His desk provides fast, transparent, and low cost trade execution; up to the minute fundamental and technical market analysis; custom strategy development; and post-trade services -- all in an effort to add value to your firm’s bottom line. Erik has been trading currencies professionally and independently for more than 12 years. Prior to leading the trading desk at EBC, Erik was in charge of managing the foreign exchange risk for one of Canada’s largest independent broker-dealers.

Interested in creating a custom foreign exchange trading plan? Contact us or call CXI's trading desk directly at 1-833-572-8933.

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