EUR / USD
The Euro initially moved higher ahead of the New York open on Friday and pushed to fresh 11-week highs just above 1.1380 as underlying confidence in the single currency remained firm. There was , however, a correction ahead of the US data with a paring of long positions after the sharp weekly gains.
The US employment data provided a substantial shock with non-farm payrolls registering an increase of 2.51mn on the month from a revised decline of 20.7mn the previous month. Consensus expectations were centred around a decline of near 8.0mn and market expectations were, therefore, out by over 10 million jobs and by far the largest miss on record. There were gains in most private sectors, including leisure, although government jobs declined by 585,000 on the month.
Unemployment declined to 13.3% from 14.7% and well below market expectations of 19.7% while the household survey recorded an increase in employment of over 3.0mn on the month. The data indicated that a substantial number of employees which had been laid-off temporarily returned to work.
The data boosted confidence in the US outlook and there are likely to be upward revisions to second-quarter GDP forecasts. Increased confidence in the US outlook helped underpin dollar sentiment, but the impact was offset by a dip in demand on defensive grounds as risk appetite improved sharply. Overall, the Euro retreated to just below 1.1300 with the dollar securing a limited recovery as markets raised estimates for the global economy.
CFTC data recorded a net increase in long, non-commercial Euro contracts which will tend to increase its vulnerability to a sharp correction if there are any negative fundamental developments. Narrow ranges prevailed on Monday with the Euro just below 1.1300 as German industrial output declined 17.9% for April.
JPY
Overall risk appetite strengthened further following the shock US jobs data and the 10-year US yield also strengthened to the highest level for over two months. Overall defensive demand for the Japanese yen declined sharply and the dollar posted 2-month highs above 109.80.
China trade data for May registered a 3.3% decline in annual exports compared with consensus forecasts of around 7.0%, but imports declined 16.7%, the sharpest decline since January 2016 and much worse than market expectations. Despite concerns over weakness in Chinese demand, overall risk appetite held firm in
Asia on Monday. Japan’s first-quarter GDP was revised to show a 0.6% decline from 0.5% previously.
There was further speculation that the Federal Reserve would shift to control of the yield curve over the medium term and markets will be on high alert for commentary on the yield curve at Wednesday’s policy meeting. As overall risk appetite held firm, equity markets held a firm tone with Japan’s Nikkei 225 index at fresh 3-month highs. The yen, however, resisted further selling pressure and the dollar traded just below 109.50.
GBP
In comments after the latest round of UK/EU trade talks, EU Chief Negotiator Barnier stated that little progress had been made and things could not go on like this forever. He also accused Prime Minister Johnson of looking to backtrack on the political declaration signed last year. Barnier and UK chief negotiator Frost both expressed frustration with the virtual negotiations and hoped that face-to-face talks would be able to resume in late June. Barnier stated that the deadline for reaching an agreement was the end of October and there were some hints that both sides considered that there was a route towards some form of agreement during the autumn.
Sterling dipped lower initially, but quickly regained ground, especially with strong global risk appetite also supporting the UK currency. Sterling peaked at 11-week highs above 1.2700 against the dollar before correcting slightly while the Euro declined to near 0.8900.
CFTC data recorded a net increase in short Sterling positions for the 13th successive week and to the highest level in close to 6 months. The data illustrates underlying negative sentiment, but also scope for a short short-covering rally if confidence improves. The UK currency held firm on Monday and traded close to 1.2700.
CHF
Swiss currency reserves increased to CHF816bn for May from CHF801bn previously, reinforcing evidence that the National Bank had been intervening to restrain the Swiss franc. There was a further dip in defensive franc demand following the US employment data as confidence in the global recovery strengthened further. The Euro strengthened to 2020 highs above 1.0900 before correcting slightly. The dollar also posted a significant recovery to the 0.9625 area. The franc secured only a slight correction on Monday as underlying demand for risk assets remained weak with the dollar around 0.9630.
