07-Dec-2020

1) Dollar Rebounds as Jump in U.S. Yields Triggers Short Covering
2) EUR/USD: Dips Might Be Seen As A Buying Opportunity, Focus Shifts To ECB On Thursday
3) A Grey and Dreich Start in London but It Ought To Clear

1) Dollar Rebounds as Jump in U.S. Yields Triggers Short Covering

The greenback pared its losses in post-nonfarm payroll New York on Friday and rebounded on short-covering due to jump in U.S. Treasury yields and ended the day higher against its major peers. The dollar initially fell to a fresh 2-1/2 year low due to continued risk-on trades but an intra-day jump in yields where the benchmark 10-year U.S. Treasury yield rallied to 8-1/2 month peak of 0.9858% triggered broad-based USD buying on short covering.

On the data front, Reuters reported U.S. nonfarm payrolls increased by 245,000 jobs last month after rising by 610,000 in October, the Labor Department said on Friday. That was the smallest gain since the jobs recovery started in May. The fifth straight monthly slowdown in job gains left employment well below its February peak.

Economists polled by Reuters had forecast payrolls increasing by 469,000 jobs in November. Hiring peaked at 4.781 million in June. Reports on consumer spending, manufacturing and services industries have suggested a slowdown in the recovery from the worst recession since the Great Depression. The unemployment rate fell to 6.7% from 6.9% in October. It, however, has been biased down by people misclassifying themselves as being “employed but absent from work,” keeping the focus on long-term unemployment and people working part-time for economic reasons.

Versus the Japanese yen, although dollar retreated to 103.75 at Asian open, renewed buying interest emerged and price gained to 104.07 in Europe on cross-selling in JPY, then rose to session highs at 104.24 in New York on a jump in U.S. Treasury yields, a price last traded at 104.14 near the close.

Although the single currency moved sideways in Asia, the pair began to rise ahead of the European open and gained to a fresh 2-1/2 year peak at 1.2177 in Europe on USD’s continued weakness. However, the euro quickly erased its intra-day gains and ratcheted to 1.2133 after the release of U.S. jobs data. Despite a brief cable-led bounce to 1.2171, the price fell steadily on a broad-based rise in the greenback and hit session lows of 1.2111 at the close.

The British pound went through a highly volatile session as Brexit talks intensified, price swung wildly on intra-day upbeat and then negative Brexit headlines. Cable moved sideways in Asia and fell from 1.3471 to 1.3409 (Reuters) in European morning on Brexit uncertainty. However, the pair then jumped to 1.3495 (Reuters) after an EU official said a trade deal between the European Union and the United Kingdom was “imminent” and then rose to a 2-1/2 year peak at 1.3540 in New York before retreating sharply to +1.3462+ as Daily Mail’s reporter said Brexit talks will break up shortly. The pound later fell back to as low as 1.3421 in late New York and last traded at 1.3437 near the close.

Reuters reported a negotiated trade deal between the EU and the UK is “imminent” and expected before the end of the weekend, barring a last-minute breakdown in talks, an official with the bloc told Reuters on Friday. Later, said talks between Britain and the European Union on a Brexit trade deal will break up shortly and there is no white smoke tonight, the said.  “Sounds like Brexit talks will break up shortly. No white smoke tonight,” Jason Groves said on Twitter was quoted by the Daily Mail newspaper’s political editor.

Reuters later revealed near New York closing, British and EU negotiators paused trade talks on Friday to call in their leaders to try to narrow gaps and get an agreement over the line, less than four weeks before Britain completes its Brexit journey out of the bloc.     After failing to agree on the basis for a deal, Britain’s David Frost and the EU’s Michel Barnier said they would brief leaders to seek new impetus for the talks, which stumbled on Thursday when London accused Brussels of making new demands.

On Saturday, Prime Minister Boris Johnson and European Commission President Ursula von der Leyen will speak to try to break the impasse, which sources said was centered on French demands over fishing rights in British waters.

2) EUR/USD: Dips Might Be Seen As A Buying Opportunity, Focus Shifts To ECB On Thursday

The EUR/USD pair on Friday climbed to its highest level since April 2018, albeit struggled to capitalize on the move and started retreating from the 1.2175-80 resistance zone. Against the backdrop of optimism over the rollout of a COVID-19 vaccine, expectations that US lawmakers will agree on a new coronavirus relief package remained supportive of the upbeat market mood. The risk-on flow continued undermining the greenback’s relative safe-haven status and was seen as one of the key factors driving the pair higher.

The USD failed to gain any respite following the release of an unimpressive US monthly jobs report. In fact, the headline NFP showed that the economy added 245K new jobs in November, far below the previous month’s downwardly revised reading of 610K and missing estimates by a big margin. The data added to market worries about the potential economic fallout from the continuous surge in new coronavirus cases and overshadowed a slightly better-than-expected unemployment rate, which fell to 6.7% as compared to 6.8% expected and October’s 6.9%.

The pair, however, lost the upside momentum ahead of the 1.2200 marks and witnessed a modest pullback of around 70 pips from daily swing tops. The downfall lacked any obvious fundamental catalyst and was solely led by some profit-taking amid overbought conditions on short-term charts. Nevertheless, the pair settled near the lower end of its daily trading range but managed to hold above the 1.2100 marks. The pair managed to regain some traction on the first day of a new week, though chances of additional easing by the ECB might cap the upside.

Hence, the key focus will be on the upcoming ECB monetary policy meeting on Thursday. In the meantime, traders might take cues from Monday’s releases of German Industrial Production figures and Eurozone Sentix Investor Confidence Index. Apart from this, the broader market risk sentiment, along with the US fiscal stimulus headlines should continue to influence the USD price dynamics and further contribute to producing some trading opportunities.

From a technical perspective, nothing seems to have changed much for the pair and the near-term bias still seems tilted in favor of bullish traders. Hence, any subsequent corrective slide below the 1.2100 mark might still be seen as a buying opportunity and remain limited near the 1.2075-70 horizontal level. This is followed by support near the 1.2040 region, below which the pair could fall further towards the key 1.2000 psychological mark.

On the flip side, the 1.2175-80 region now seems to have emerged as immediate strong resistance. A sustained strength above, leading to a subsequent move beyond the 1.2200 mark has the potential to lift the pair towards the 1.2235-40 intermediate resistance. Some follow-through buying should pave the way for a move towards the 1.2300 mark en-route March 2018 monthly closing highs resistance near the 1.2315 region.

3) A Grey and Dreich Start in London but It Ought To Clear

A grey and dreich start in London but it ought to clear. Rather like the weather, it’s all looking a bit murky as far as Brexit goes this morning. European stock markets opened cautiously on Monday with Brexit risks squarely in focus as talks over the weekend seem to have delivered little real progress. There are various reports circulating this morning, but the one that counts will be the official statement. Reports of a breakthrough on fishing rights seem to be premature, with UK officials saying the EU is ‘literally making it up’. There is no white smoke yet – the two sides continue to talk and work towards a deal. A complicating factor this week is the internal market bill, which is going through the Commons again and has really got up the noses of the EU. The dealmakers will not let that stop the talking, but it could create headlines.

Sterling risks to Brexit no-deal endgames were exposed this morning as the chatter was less optimistic than many of us thought it would be, with reports in one paper indicating Boris Johnson is ready to walk away within hours. Moreover, confusion over progress on fishing has clearly unnerved the market. GBPUSD slipped from 1.34 overnight to 1.3280 in early trade, a chunky move to start the session and reflective of both the pound’s sensitivity to headlines and the severe downside risks from a no-deal Brexit. THE latest CFTC figures show a sharp reduction in net long positioning on sterling.

US stocks soared to a new record high on Friday. The S&P 500 climbed 0.9% to 3,699, closing at the highs of the day. A lackluster US jobs report showing just +245k jobs were created last month lifted stocks and saw bond yields rise as it ought to incentivize Congress to pass a stimulus bill this year. The bad news is good news again – for now, markets are happy to jump the shark and look ahead to stimulus bridging the worst of the crisis until vaccines drive economic recovery in 2021. There was some serious curve steepening action on Friday with the US 10-year yield rallying above 0.98% and a big clear out at 1% is now ‘on’. The 2yr/10yr spread is now its highest in almost three years.

Stimulus seems a lot more likely and a $908bn bipartisan package could be passed as early as today. The weaker jobs report combined with surging case numbers across the US has left lawmakers with little choice, albeit the deal on the table has been drawing criticism from both sides of the Washington divide. All Americans who wish to take a vaccine should be able to by the second quarter of 2021, the US Health and Human Services head Alex Azar said.

Data is light today, but Asian markets were mixed after China’s exports rose over 20% in November, the fastest clip in three years. German industrial production rose 3.2% in October, beating expectations but likely to the best for some time with November’s restrictions kicking in. Bavaria has just announced a much stricter lockdown lasting until early January.