Euro erases losses as the resilience continues

Euro back above 1.19

Euro back above 1.19
No one seems to like the euro as it struggles with another covid wave and an inability to conclude a collective fiscal passage.
Yet someone is buying. EUR/USD has climbed to 1.19 from 1.17 at the start of the month. Today it dipped back to 1.1867 but has rebounded to unchanged. Barring a surprise in the next few hours, it will close near the highs of the week.
We’re a universe away from the old days of 1.60 and Gisele Bundchen wanting to be paid in euros but the negative sentiment and reality that eventually Europe will get the vaccine is a recipe for a contrarian trade.
There are also signs that the eurozone is coping with covid better than expected. The surprise index from Citi for the eurozone is currently the highest in the world at +150.

CFTC Commitments of Traders: EUR longs continue to get covered. JPY shorts remain steady

Weekly forex futures positioning data for the CFTC for the week ending March 30, 2021

  • EUR long 68K vs 74K long last week. Longs trimmed by 6K
  • GBP long 20K vs 25K long last week. Longs trimmed by 5K
  • JPY short 58K vs 59K short last week. Shorts trimmed by 1K
  • CHF long 3K vs 4K long last week. Longs trimmed by 1K
  • AUD long 4K vs 12K long last week. Longs trimmed by 8K
  • NZD long 3K vs 4K long last week. Longs trimmed by 1K
  • CAD long 3K vs 7K long last week. Longs increased by 4K

Highlights:

  • All net positions trimmed
  • The new positions show long currencies, and short the USD with the exception of the JPY which shows short JPY and long the USD
  • The AUD long was trimmed the most (8k).
  • JPY, CHF and NZD only saw positions trimmed by 1K

US dollar gets a small pop on non-farm payrolls

Decent US dollar move, but certainly nothing sensational

Decent US dollar move, but certainly nothing sensational
The US dollar caught a quick bid after a roundly-stronger March non-farm payrolls report. The US added 916K jobs in the month, besting the +660K consensus estimate.
USD/JPY jumped to a high of 110.68 from 110.55 on the data and there were similar USD kneejerk moves higher across the board. Overall though, the market was restrained, owing to holidays in Europe and North America.
Bonds also sold off with US 10-year yields up 2.2 bps to 1.68%. US equities will remain closed today but S&P 500 futures rose by 18 points.
I think this report will add more fuel to the dollar fire on Monday, particularly in USD/JPY and USD/CHF, which benefit from yield differentials. The US dollar fell against CAD on the report and is flat against the antipodeans. I think that’s generally the right idea, as the Canadian economy continues to piggyback on strong US reopening demand.

Yen forecasts from the Bank of Japan Tankan survey

Main survey results here

As part of the survey businesses are asked for a yen view:
USD/JPY seen at 106.71 (average for FY 2021)
EUR/JPY 123.10
Also views on inflation
  • CPI seen at 0.4% y/y in 12 months time
  • 0.8% in 3 years
  • 1.0% in 5 years

USD/JPY extends to just shy of 111

Further yen weakness, USD/JPY and yen crosses have accelerated higher on the session here.

  • high is circa 110.97
  • a one year high
There has been little in the way of specific news on the yen – although Japanese TV is reporting that coronavirus restrictions are being prepared for Japan’s second city of Osaka.
The USD is showing wider strength pretty much across the board.

EURUSD falls to lowest level since early November 2020. New low for the month.

Falls below daily trend line.

The EURUSD has continued its move lower after a choppy but lower session on Monday. The pair is working on its 5 day down in 6 and in the process, has moved to a new low for the month and trades at the lowest level since November 4, 2020.
Falls below daily trend line.
Looking at the daily chart above, the pair cracked below a lower trend line cutting across at 1.1748 today. That is near the swing low from November 11 at 1.17449.  That area is now close risk for sellers looking for more downside. Stay below the break, keeps the sellers in control.  The next target on the daily is the 38.2% of teh move up from the March 2020 low which comes in at 1.16947 (around the 1.1700 level). The currently price is at 1.1730 – just off the low for the day at 1.1728.
Drilling to the hourly chart below, the pair stalled the rallies yesterday near a topside trendline. The parallel channel trendline on the downside target 1.1719 currently (and moving lower).  A move below would have traders targeting the 1.16947 retracement on the daily (with 1.1700 a natural support target as well).
The EURUSD on the hourly chart
In addition to the resistance on the daily chart at 1.1745-48 area, the EURUSD fell below a floor on the hourly at 1.1761 area.   That too will be eyed now as resistance (and a bias level) that would keep the sellers in control.

Understanding the USD’s narratives

USD in focus

At the start of the COVID-crisis we saw the USD and US 10 year yields move in negative correlation to one another. When 10 year yields rose, the USD fell. Why was this? This is because both were acting as safe havens. A worried world wanted to buy US treasuries (this causes bond yields to fall) and they wanted the USD as the most liquid currency

What changed?

Then in March the world started to focus on the US growth story. This more optimistic footing allows US 10 year yields to rise alongside the USD.

Why has the above changed again?

Germany in extended lockdowns, oil prices falling, AstraZeneca roll outs slowing + health scares have all led to the reflation trade being questioned last week. So, this is why we are seeing the COVID relationship between the US 10 year yields and the USD return.

So, in summary.

A worried world:

Rising US 10 year yields – falling dollar
Falling US 10 year yields – rising dollar

USD in focus

A world focused on US recovery:

Rising US 10 year yields – rising dollar
Falling US 10 year yields – falling dollar

USD

Hope this helps to see what is driving the USD and when.