The USD rallied and the price of gold (-1.97%) had its biggest one-day loss since late February this year on the back of the massive ADP surprise. The analyst consensus expectation was quite modest compared to the actual number released. Analysts had projected a slight decrease from the previous ADP jobs number (645K expected vs. 654K previous). However, the ADP payrolls data revealed a massive surprise. Automatic Data Processing Inc. confirmed the actual number at 978K new jobs. This massive improvement creates a lot of expectations for the official NFP release to be much better than the expected 645K (previous 266K). By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
The 10-yr US Treasury yield increased 3.6 basis points to 1.6300% overnight and accelerated the decline in the price of gold (-1.97%). We pointed out in yesterday’s video (here) how a bearish wedge was indicating lower prices in gold.
The NZD lost the most against the USD after the ADP jobs report was released. The currency had already been weak and was hit the most as the dollar positive report was released. As commodities as priced in the USD, they are vulnerable to rallies in the greenback. Therefore, it’s not a surprise that the AUD was also hard hit. The measures put in place by the Chinese authorities to curb the price advances in commodities had already slowed the currency down and now broad-based buying in the USD sent the AUDUSD significantly lower. WTI futures didn’t drop which helped the CAD that showed relative strength among the majors.
The Nasdaq Composite (-1.03%) took a dive as higher yields raised concerns of higher financing costs for growth companies in the future. Russell 2000 (-0.81%) was the next biggest loser for the same reasons while the losses in the S&P 500 (-0.36%) and the DJIA (-0.07%) were more modest. The sector losing the most was the consumer discretionary (-1.19%) with the technology sector (-0.93%) right behind it. The consumer staples and the utility sector were gaining inflows indicating defensive positioning by the investors.
We alerted our traders to a potential weakness in the price of gold yesterday (here) and gave a measured move based target zone (1860 – 1871) this target was reached in yesterday’s trading.
The price of gold has retraced to 23.6% Fibonacci retracement level and has since attracted some buying after the sizeable drop yesterday. The fall was, however, the biggest since February 25th when the price of gold dropped over 2% in one day. Yesterday’s peak in the downside volatility means the uptrend is now over and the psychology among the traders is different than it was during the uptrend in the March to May period. We expect, therefore, to see increased volatility over the coming days. Key price levels for today’s potential NFP volatility trading are 1845.50 (support) and 1890 (resistance). Key price areas and level beyond these levels are 1797 – 1805 (a historical support level and the 50-day SMA) and 1916.55 (the most recent reactionary high).
We highlighted yesterday that USDJPY was trending higher and that it had been able to put in a higher reactionary low at 109.33. It was our view that yesterday’s rally indicated how the bulls were in charge above the 109.33 support level. This is indeed what happened and the USDJPY pair rallied 0.65% yesterday. The pair is now trading at 110.24, or about 32 pips away from the upper end of the rising price channel (currently at 110.56). While the immediate upside is getting limited the uptrend is still in force. The nearest key price points for USDJPY are 109.33 (support) and 110.56 (resistance). The next key support and resistance level beyond these are 110.14 (the channel low) and 110.96 (the March high).
We said earlier that the 1.2132 is a highly important support and now that it was broken yesterday EURUSD remains weak. The pair has not only violated this key support level but has also created a lower reactionary high at 1.2254. A measured move projection from the breakout point indicates a move to the 38.2% Fibonacci retracement level would not be a surprise. At the time of writing EURUSD is trading at the lower end of a downward pointing channel. While it is impossible to say what the NFP release will be like and how EURUSD will move this afternoon we know that expectations are now quite high (rumours talk about 800k new jobs) which creates vulnerability for the USD. A disappointment with the number of new hirings would be likely to send the USD lower (and the EURUSD higher). The key price levels for today’s trading are 1.2222 (the channel high), 1.2185 (the 50% Fibonacci retracement level from the latest high to today’s low) and 1.2051 (the 38.2% Fibonacci retracement level).
Macro Drivers for the USD
As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.
|The FED||The Fed has on several occasions repeated its commitment to ultra-accommodative monetary policy. The rates are likely to stay near zero but now some Fed officials have said that the Fed should start considering potentially tapering their asset purchases.|
|Stimulus||The US lawmakers have authorised approximately five trillion dollars of economic stimulus and the Biden administration has indicated it will seek to deliver another two trillion dollars in infrastructure spending.|
|Yields||After trending higher since the beginning of August 2020, the Treasury yields have been moving lower or sideways. All in all, the yields and interest rates are extremely low on both nominal and real basis.|
|Payrolls||The latest miss in payrolls was the biggest in the recorded history. Analysts expected to see one million new jobs in April but the actual number came in at 266K (down from 770K in March).|
|Inflation||As per CPI inflation is running at a 5% annual pace over the last 6 months, while PPI shows annual inflation pace at 7.4% over the same period.|
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Market News & Facts
- US President Biden will speak today at 2.15 pm GMT
- Flexible QE expected from the RBA
- Goldman Sachs expects 750K new jobs today (NFP)
- The first signs of tapering as the Fed starts to exits corporate bond positions
- Lagarde says ECB is committed to preserving favourable financing conditions
- Mora, EU chief coordinator of Iran talks optimistic about an agreement next week
- Australian May Construction PMI 58.3 (59.1 previous)
- Australian Q1 GDP +1.8% q/q (+1.5% expected)
- RBA’s Lowe taper talk not pushing the AUDUSD higher
- Ramsden at BOE suggests demand could get ahead of supply
- UK Nationwide m/m change in house prices +1.8% (+0.8% expected)
- Chinese authorities relax emission controls, iron ore and AUDUSD higher
- Chinese Caixin manufacturing PMI for May 52.0 (52.0 expected)
- Australian Net exports -0.6% relative to GDP (-1.2% expected)
- New Zealand Business confidence for May 1.8 (vs. previous -2)
The Next Main Risk Events
- USD – Fed Chair Powell’s Speech
- USD – US President Biden’s Speech
- CAD – Employment Change
- CAD – Unemployment Rate
- USD – Non-Farm Employment Change
- USD – Average Hourly Earnings m/m
- USD – Unemployment Rate
- CAD – Ivey PMI
For more information and details see the TIOmarkets economic calendar here.
Chief Market Analyst
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