By Dean Popplewell
The forex market must be delighted with the month-end price move, you may not agree with it, but it happens to provide many with trading opportunities. The thing about month-end transaction is that it's mostly a necessary position changing requirement and not essentially a technical or fundamental move. The falling yield frenzy in the global bond market should not be helping the USD, however, due to some of the month-end needs it has managed to push the mighty buck to a two-month high against a basket of currencies.
The EUR printed a fresh three-month low of $1.3587, while sterling suffered its biggest fall in four-months to £1.6697, a dramatic reversal from its rally to a near five-year high just shy of £1.7000 earlier this month. Also, not helping forex price action with depth is Ascension Thursday in Europe – it's keeping participation at a minimum with Austria, Denmark, Luxembourg, Iceland, Finland, Sweden, Switzerland and Norway closed. The single currency is down from €1.39+ since Draghi first hinted at a June cut after the May ECB meet.
Some investors are taking advantage of the moves while others prefer to wait out the long lay up to next week's ECB monetary policy meet (June 5th) where euro-policy makers are expected to deliver some new "easing" freshness. This highly anticipated meet has so far priced a lot into "expectations". If Draghi and company fail to deliver an aggressive outcome, euro policy makers will lose face, credibility and the market will punish the EUR back towards the psychologically defended €1.4000 handle where it has recently come from very quickly.
The USD is not a winner against JPY. Falling US 10-year Treasury yields (+2.43%) is keeping pressure on the USD/JPY (¥101.52). The yen happens to also be benefiting from cross interest selling that also been month-end instigated. Even the BoJ's announcement of buying JGBs is doing little to support the dollar. US yields are currently atop of its July 2013 lows. This is generally a sign that investors are nervous about global growth prospects or geopolitical risk. However, for many interested fixed income accounts, the yield pullback has more to do with their overstretched bets against US debt during the Fed's tapering process. The market has always believed that US rates would be trading higher because of tapering and would lead to further dollar support. However, the first six-months of this year has managed to convince many to reconsider slashing their year-end "yield" predictions. With low inflation and "lower for longer rates" and despite the Fed having finished its bond buying as early as this October, US 10-year yields projections have been cut to +3.15% from +3.5%
Big picture, the EUR remains under pressure with immediate risk towards the €1.3550 and €1.35 still a possibility. Much lower levels are not expected ahead of the ECB meet next week. What will provide some support for currencies this morning will be the confirmation of an underperforming US economy. Contracting Q1 US growth could deliver some short-term relief to both the EUR and GBP. Despite the European holiday, markets seem braced for the first negative quarterly US GDP preliminary reading in three-years. Many investors are encouraged to look past it, and this despite the buying frenzy in the bond market that has pushed US yields to yearly lows.
The market has been trying to price in a negative -0.5% print for Q1 GDP, revised down from a first reading of +0.1%. First-quarter growth was troubled by severe weather – however, it cannot be the only factor. Downward revisions to inventories, construction and net trade could be offset slightly by an upward revision to consumer spending. Remember with three GDP readings per month (advanced, preliminary and final), Q1 GDP could ultimately be revised to a positive number in the third and final reading next month. To many, the negative impact to the dollar is expected to be limited as economic growth is rebounding strongly in Q2.