The USD’s bounce since the beginning of the month appears to be gaining more traction, with the USD index up over 3% from its recent lows. I’m still cautious about whether this move can extend much further in the absence of a back up in US bond yields especially given ongoing asset purchases / global USD liquidity injections by the US Federal Reserve at least until the end of June.
Nonetheless, given the magnitude of USD short positioning, which had moved ever close to revisiting record levels, the potential for short-covering was significant. US data today could provide some influence, with attention on April retail sales data, PPI inflation and jobless claims. A relatively positive outcome for retail sales could give the USD further support.
The day has started badly for the AUD, with the currency hit by an awful jobs report, with employment dropping by 22.1k in April compared to consensus expectations of +17k. The details were even more negative than the headline reading, with full time employment dropping by 49.1k and only partially mitigated by a 26.9k rise in part time employment.
The Reserve Bank of Australia will likely pay close attention to the data and it will likely result in any residual expectation of a rate hike by the RBA next month being taken off the table. Already today there has been a sharp rally in bank bill futures as markets pare back interest rate expectations and markets are not even pricing in a further full 25bps rate hike by year end.
The data weighed heavily on the AUD, with AUD/USD hitting a low below 1.06. AUD is likely to trade with a heavy tone over coming sessions, with the currency already under pressure from a generally firmer USD. Moreover, the rally in Australian bank bill futures will add further pressure to the currency as Australia’s favourable rate differential narrows further with the US.
Taken together with the fact that AUD positioning is close to its all time highs and that even compared to interest rate differentials its gains look overdone, it suggests more downside risks over the short-term, with AUD/USD 1.0537 seen as a near term technical support level.
In contrast GBP benefitted from a back up in UK bond yields in reaction to the Bank of England’s Quarterly Inflation Report. Inflation forecasts were revised higher but growth forecasts were revised lower as expected. The In truth, the reaction looked overdone but GBP has gained some momentum versus EUR and looks set to extend its gains, with focus on the 200 day moving average level of 0.8558.