The EUR/USD Squeeze
While it has been an extremely quiet trading with nearly all of the major currencies consolidating against the U.S. dollar, everyone cannot stop asking about the intraday squeeze in the EUR/USD. The currency pair jumped from 1.2570 to 1.2600 in a manner of minutes and extended its gains to 1.2627 before the end of the European trading session. There was little movement during the second half of the North American session, which tells us that most U.S. traders left early for the holiday. U.S. markets will be closed on Wednesday for the July 4th Independence Day holiday. Currency markets will remain open but with lower volatility and thinner trading volumes. The short squeeze in the euro reflects pre-holiday and pre-ECB repositioning by EUR/USD traders. According to last week's CFTC IMM data, speculators remain very short euros and today's price action tells us that many of them do not want to hold their shorts ahead of the ECB meeting. This is interesting because economists are looking for a rate cut from the ECB. Believe it or not, a rate cut could actually be positive for the euro but we'll explain that in more detail in our ECB/BoE preview that we will release on Wednesday.
Meanwhile the persistent decline in Spanish and Italian bond yields provided some support to currencies and equities. Eurozone producer prices were released this morning and the latest data showed prices falling 0.5 percent in May and the decline in inflationary pressures means these central banks can increase monetary stimulus without boosting prices to unsustainable levels. Final Eurozone PMI numbers will be released on Wednesday along with Eurozone retail sales figures. Weak spending in Germany and France points to softer spending in the region as whole. It should be another quiet trading day with any volatility concentrated in the European trading hours.
USD: Counting Down to Payrolls
The only piece of U.S. data on the calendar today was factory orders and while there was a nice increase in the month of May, the impact on the U.S. dollar was nominal. With North American traders thinking about nothing other than barbeques and fireworks, the dollar traded lower against all of major currencies except for the Japanese Yen. Once traders return from their holidays on Thursday, the focus will quickly shift to Friday's non-farm payrolls report. On Thursday, the non-manufacturing ISM index will be released which is one of our favorite leading indicators for NFP. The employment component of service sector ISM declined sharply in April and May, which correctly forecasted the pullback in job growth during those months. If this index fails to rebound on Thursday, it will be hard to believe that payroll growth accelerated. Economists are looking for 90k new jobs in the month of June, up from 69k in May. The ADP employment change and Challenger job cuts reports will also be released after the holiday. All these numbers will help to craft the market's expectations for NFPs. Based on the recent price action of the U.S. dollar, investors don't have high expectations for job growth and correctly realize in our opinion that unless more than 150k jobs were created last month the Federal Reserve will still be hard pressed to increase asset purchases later this year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.