February US NonFarm Payroll numbers came in stronger than expected at 235k vs a street estimate of 190k. Even though the number cements a March FOMC rate hike this Wednesday the USD was unable to continue its aggressive rally however as profit taking overwhelmed.
Some of the USD weakness is also down to a sharp reversal in the EUR/USD from low 1.0500 level on Thursday to close at 1.0680. The rally was sparked from a perceived hawkish shift from the ECB that stated they don’t expect to ease any further from here and the next move would be to start tapering at the end of the Year.
The small but subtle shift is important as markets suggest he bottom is in for European yields and only higher from here is a strong catalyst for currency strength over the medium term. What is important in currencies is not so much the difference in interest rates but the expected difference in 2 years from now. The 2 year spread is very important in all FX pairs but is particularly tradeable in the USD/JPY and EUR/USD and AUD/USD.
The USD profit taking has meant key levels with USD/JPY at Y115 has held and AUD/USD has held at 0.7500 for now. The next big test for these levels will likely come from the largely priced in rate hike on Wednesday. Traders will be closely watching Yellen’s words for hints as to how quickly they want to hike again this year.
The divergence between the European/US and Japanese yields is now getting more pronounced and is the main reason for the trade of the week in long EUR/JPY.
| Technical Analysis |  |
|
(=)
