The capacity for this bull run to continue higher has been given a boost once more as the European Central Bank announced a larger than expected increase to its pandemic support programme. The risk recovery is back in full swing after the ECB increased its Pandemic Emergency Purchase Programme by more than expected at a further €600bn. The euro has been a big beneficiary to this move, but risk appetite being strong is a big negative for the dollar right now, which is getting hit hard again across its major pairs. The one exception is versus the uber safe haven Japanese yen. The big story has now become just how far a recovery on the euro can go. The policy action of the ECB has suggested that the central bank will be the ultimate backstop during this pandemic and the prospect of massive purchasing of government debt for the next 12 months, it is significantly reducing the risk premia for the euro. It is leading to a key re-rating of the euro. However, with such a huge move, also comes the risk of near term profit-taking, but for now the run remains on track. Today the focus turns to the US labor market and Nonfarm Payrolls for May. The consensus expects another 8m jobs to have been lost and unemployment to have soared to close to 20%. However, unemployment is backward looking data, and the economy beginning to come out of lockdown will not be factored in to the data to any real extent. Whilst any negative surprise would still jolt the market, the appetite to buy into this FOMO (Fear Of Missing Out) rally will still be a dominant factor, especially as traders see central banks still willing to backstop the whole game.
Wall Street picked up off its lows of the session to close only marginally lower on the S&P 500 (-0.3% at 3112). US futures have also kicked on again today, with the E-mini S&Ps +0.8% initially. Asian markets have been positive with this, as the Nikkei closed +0.7% higher and Shanghai Composite +0.3% higher. European markets also retain positive momentum, with FTSE futures +0.9% and DAX futures +1.4%. In forex, the risk positive bias remains strong, with AUD and NZD once more soaring higher, whilst GBP is breakout out versus the dollar and EUR also continues to run. The big underperformer remains JPY. Commodities show and oil price which continues to run higher, whilst gold and silver are mixed.
Today’s economic calendar is dominated by US jobs report. The US Employment Situation for May is released at 1330BST and it is expected to show some eye watering numbers once more. The headline consensus is for Non-farm Payrolls of -8.000m (after an incredible -20.537m last month). The Unemployment rate is expected to increase as a result to 19.8% (from 14.7% in April). There is also expected to be another increase to the Average Hourly Earnings by another +1.0% on a monthly basis to a year on year +8.5% (+7.9% in April). Also watch for the laborforce Participation Rate which fell to 60.2% last month.
Chart of the Day – EUR/JPY
There is a massive re-rating of the euro underway. This is driving EUR crosses higher in unison, but one of the key movers has been EUR/JPY. The cross has smashed through months of resistance in recent sessions with what is now nine consecutive positive closes. The last three consecutive bull candles have been massive too. The move barely paid any notice to the resistance of the February highs around 121/121.40 and during yesterday’s latest smash higher, went through 122.85 which was the January high. In four weeks, the cross has moved from three year lows to a one year high, adding 9 big figures along the way (almost +8%). We turned bullish two weeks ago and the move has gone way beyond our near term expectations (which was 121.00/121.40). This is a market that pays little respect to resistance right now, with the next levels of note 125.20 and 126.80. It does though leave the market massively stretched near term and at risk of at least some initial profit taking in the coming sessions (even if this euro re-rating is an ongoing move). This leg of the re-rating will likely be a run ended by exhausted momentum and when bull runs go almost exponential, it is a time to be a little wary too, and to potentially tighten profit-trigger levels.. The volatility means that it is a difficult market to time, but looking for signs of negative divergence on the hourly chart may give a clue. The latest breakout support band 122.50/122.85 would need to hold to sustain the momentum of the bull run. A loss of 121.80 support (yesterday’s low) would likely induce a corrective move, but for now the bull run continues.
The rally on the euro has been incredible. It was clear from the price action yesterday that we were not the only ones in being a little nervous of how much further the move could go in the near run. Trading around -50 pips lower ahead of the ECB, the feeling was that the move had could be coming to a halt. However, with a larger than expected expansion of the ECB’s PEPP programme EUR got another boost from the jet-pack once more. The run formed another huge bull candle, for 8 consecutive positive closes in a row and is continuing higher today. Momentum is also extremely strong with RSI into the high 70s (the massive volatility of March saw the RSI top out at 80), MACD lines accelerating higher and Stochastics strong. Given the nature of this move, it now enters very difficult territory. Clearly the euro has gone a long way in a very short space of time. With the market now pricing in the ECB move, the run could now begin to be subject to profit-taking. SO we must look to the hourly chart for signals. There is no evidence of negative divergence yet though. Watch for hourly RSI dropping back below 40 and MACD lines below neutral for an indication. Initial support at $1.1310 may also be a gauge today. For now we run with this euro move, but it is with increasing caution and believe that tightening profit triggers may be wise.