Dollar Pared Recent Losses Ahead of NFP Print

6 May 2016

Rates & FX Market Update

Dollar Pared Recent Losses Ahead of NFP Print

Highlights

¨   Global Markets: While UST yields trended 2-3bps lower overnight on weak weekly initial claims (274k; previous: 257k) and a retracement in oil prices late session, dollar continues to rebound from its 15-month low on Tuesday, surging 0.64% overnight as traders pared short USD positions ahead of the closely-scrutinised NFP. Fedspeak continues to build the case for a live June meeting, with 4 regional Fed presidents reiterating the data-dependent nature of the decision; remain mild overweight UST duration. Over in UK, services PMI came in weaker (52.3; consensus: 53.5), compounding on the weak manufacturing print, where the economy and sentiment is likely to face greater headwinds ahead of the June referendum; stay neutral GBP. In Australia, AUD halted its decline after solid new home sales, retail sales and trade balance prints, where the currency jumped marginally (0.09%) against the USD overnight despite the latter’s strength; stay neutral AUD.

¨   AxJ Markets: Chinese services PMI came in a touch weaker (51.8 vs 52.2 in March), although new orders improved to the strongest in 3 months. Nevertheless, the economy continues to face growth headwinds, underpinning our expectations for another 50bps rate cut in 2H16 to support economic rebalancing; remain constructive on short-dated CGBs. The soft Chinese PMI have weighed on regional currencies, including the AUD and KRW (-0.85% against USD), where investors are likely to scrutinise the key trade data due over the weekend for further cues. Over in Malaysia, USDMYR broke above the 50DMA yesterday on poor regional sentiment and USD strength, with the latter weighing on crude oil prices despite tighter supply dynamics due to Canada’s wildfire; while we opine for MYR headwinds in 2Q16, we maintain our neutral stance over the medium term.

¨   EURUSD fell 0.73% overnight as traders took profit on long EURUSD positions ahead of payrolls. With soft inflation set to persist over the medium term, alongside potential “tail” events (Brexit, Spanish elections etc), we remain inclined to maintain our mildly bearish EUR stance as we expect ECB to deliver another 10bps rate cut over 2016, although we prefer to express our short EUR view against non-USD currencies.