The US dollar took a hit in the wake of the dovish Fed monetary policy shift last week but after a run of positive data on Friday which helped to settle nerves surrounding the US economy the dollar bulls found legs again and this has continued into Monday. Reaction to a very strong Nonfarm Payrolls report seemed a little unsure as the recent Government shutdown means that much of this positive surprise could easily be revised away. However, the upside surprise and strong improvement in the ISM Manufacturing comes at a time where other economies have been really struggling. The sense that the US economy is still holding up is helping to support the dollar early this week. The reaction has been for a decisive jump in Treasury yields and a dollar rebound. Yields are holding up this morning and it is interesting to see the Dollar/Yuan (offshore) rate rising strongly again today. This is often a good indication of dollar strength across currencies. The fact that it is Golden Week in China could also play into this move. The dollar rebound is negative for gold today, whilst another of the safer haven plays, Dollar/Yen is also being impacted as the yen comes under pressure.
Wall Street edged higher into the close on Friday with the S&P 500 +0.1% at 2706, whilst US futures are a shade above neutral today. Asian markets are responding to the risk positive US data, with the Nikkei +0.5% and Shanghai Composite +1.3%, whilst Europeans come into today’s session somewhat more circumspect given the FTSE futures are a few ticks lower and DAX futures a few ticks higher. In forex, there is a continuation of the mild dollar positive bias, with the yen being the main underperformer. In commodities, this dollar rebound is playing out through a bout of profit-taking that has set in on gold, whilst oil is all but flat.
It is a relatively quiet day on the economic calendar. The UK Construction PMI is at 0930GMT (accounts for around 7% of the UK economy) and is expected to slip a touch to 52.6 (from 52.8 last month). The US Factory Orders for November (delayed by 28 days) are at 1500GMT and are expected to show monthly growth of +0.2% (-2.1% in October).
Chart of the Day – AUD/JPY
There has been a real battle over recent weeks, with a perception of risk appetite fluctuating. It is therefore interesting to now see that Aussie/Yen is tracking higher. The old resistance band 78.55/79.00 has now been cleared with three consecutive closes above 79.00. This is opening the way for continued recovery towards 80.50 which is the next pivot. This comes with the market now using 78.55/79.00 as a basis of support for buying opportunities. The momentum indicators are increasingly improving now, with the RSI confirming the breakout and rising at multi week highs, whilst the Stochastics have swung higher, and both have upside potential. On the hourly chart there is increasingly positive configuration where corrections are finding lows on hourly RSI around 40 and the MACD lines have crossed higher around neutral. There is little real resistance until the 80.50 pivot. Support at 77.50 is now a key higher low.