Wednesday, March 6, 2019

The Dollar Reigns Supreme As Domestic Data Beats Estimates.

Tags
  • Dollar
  • Gold
  • Yen
  • Euro
  • Pound
  • Stocks

MORNING BRIEFING

The Dollar is dominating the trading action during a busy week filled with important data releases and central bank guidance. The US currency is boosted by better than expected domestic also weakness seen across the usual high beta currencies, which comes to contrast with earlier indications for a risk-on rally when news that the US and China were close to a trade deal hit the wires over the weekend. Equities looked to stabilize after the initial still the futures in Europe and the US suggest a bearish opening bell. Gold continues to suffer the combination of reduced risk-off flows and a surging Dollar while Oil trades sideways around the $57 mark.

The greenback sees fresh support from domestic data that surprises to the upside. Yesterday, the Services PMI came slightly below the market's estimate of 55.8, printing 55.5, although the ISM Non-Manufacturing PMI printed 59.7 from 56.7 in January, its biggest gain in a year. Is that enough to prompt the US currency to new highs, especially versus the Yen where prices have been failing to break above the 112 barrier? We believe that this depends on the manner the Non-Farm Payrolls will print on Friday and today's ADP employment data will be a useful precursor to the US labor market report. A strong ADP figure today will hint a robust NFP reading on Friday and the Dollar will be on its way to break above 112; otherwise, signs of weakness will disappoint the bulls and drive prices towards 111.20 again.

The Euro continues to point lower. The shared currency fell to a fresh 2-week low of 1.1289 during yesterday's US session, as the Dollar broke higher on stronger than expected data. Positive EU data failed to boost the pair, which extended its decline after US figures came upbeat. With the ECB meeting being the key event for this week and Mario Draghi expected to reiterate the need for an “ample degree of monetary stimulus” the Single currency is likely to see more losses towards 1.1250.

Gold has seen quite a collapse over the past few sessions, having now retreated close to 5% from its February highs. Support after support has given in as investors saw little reason to seek the yellow metal's safety as geopolitics seem to be less of a concern at this stage, but this may change soon. Granted, the global political arena may seem somewhat quieter in recent if fears of a global growth slowdown re-emerge, market participants will again flock to the safe haven instrument. In the meanwhile, Gold's price action will depend on how the incoming US data will print: the next support level is found around the $1,278 area and in case of a reversal higher $1,296 is the level to watch.

Oil continues to oscillate on either side of the $57 mark. Prices gained earlier in the week on the back of bulls' hopes for an end to the Sino-US trade war that will allow demand to increase rapidly while OPEC's agenda to continue reducing supply also helps build a bullish case. However, it seems that oil traders need concrete evidence of progress on both fronts before they commit to substantial long exposure; as soon as this happens, $58, $60 and $62 are the next key areas to keep an eye on.

Equities are now looking to stabilize after a sudden tilt to the downside that caught investors off guard. With the major headlines discussing the apparent progress in the US-China trade talks, market participants were looking for a bullish the consensus appears to be that “the good news was already priced in”. This might make sense to in our opinion, it also highlights investors' nervousness at this time and we may see more losses in the short term. However, we remain optimistic of more gains in the medium term, based on the comfortable degree of central bank stimulus still supporting the system and the lack of evidence in regards to a global slowdown at this stage.

MARKET EVENTS TO WATCH

  • US ADP Employment Change - 5.15pm
  • DOE U.S. Crude Oil Inventories - 7.30pm

All times are GMT +4.