Can USD/JPY Take Out 103.00?

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Market Drivers for June 4 2014

AU GDP grows at 1.1% in Q1 pushing AUD/USD to a test of 9300

UK PMI Services at 58.3 hiring matches 17 year high

Nikkei 0.22% Europe -.09%

Oil $103/bbl

Gold $1246/oz.

Europe and Asia:

AUD GDP 1.1% vs. 0.9%

EUR Final Svc. PMI 53.2 vs. 53.5%

UK Svc. PMI 58.6 vs 58.3

EUR PPI 11.7% vs. 11.8%K

North America:


USD Trade 8:30 AM

USD ISM Svc. 10:00 AM

CAD BOC Statement 10:00AM

Data out of both Australia and UK surprised to the upside providing a mild boost to Aussie and cable respectively, on a generally quiet night of dealing as currency markets remained steady ahead of the ECB meeting and the US NFPs scheduled for the later part of the week.

In Australia Q1 GDP printed at 1.1% versus 0.8% eyed registering a much stronger than expected 3.3% annual growth rate. Although the headline figure was impressive, analysts noted that the subcomponents of the release were not nearly as stellar.

Domestic demand increased by only 0.3% versus 0.8% forecast. Business investment fell by -1.2% and infrastructure activity slumped by -5.5%. The surge in the GDP data was primarily due to seasonal adjustments in the mining sector that benefited from favorable weather and was therefore able to operate near full capacity during the rainy cyclone season.

Furthermore the skeptics noted that going forward the Australian economy faces a number of challenges including deteriorating consumer sentiment, tighter fiscal policy and slowdown of growth in China. Yet despite concerns about China the steady performance of the mining sector suggest that the demand for iron ore remain robust and should act as a support for the overall Australian economy going forward.

Aussie rallied strongly in the aftermath of the release, spiking to a high of 9300 as markets started to speculate that RBA next interest rate move might be up rather than down, but the pair quickly settled down as the details of the report were digested and the consensus view settled on the notion that central bank will remain stationary for the foreseeable future. Nevertheless the Aussie remained well bid on the crosses especially against the kiwi as AUD/NZD rose above the 1.1000 level for the first time this year. The pair has seen a remarkable turn of events rallying from the lows of 1.0500 as market sentiment changed radically with traders now questioning the prospect of further rate hikes out of the RBNZ given the sharp decline in milk prices while feeling much more comfortable with RBA as the Australian economy appears to have suffered far less damage from the slowdown in China than originally thought.

In UK the Services PMI came in at 58.6 versus 58.7 the month prior but still a bit better than 58.3 anticipated. UK economy continues to fire on all cylinders with service sector employment strengthening at the fastest pace in 17 years while other sectors remain at historic highs. Still cable saw little reaction from the data rallying only 25 points in the aftermath of the release as traders remain skeptical that the BoE will move to normalize monetary policy anytime before next year.

In North America today, the focus turns to the ISM Services report and the ADP data. US rates have stabilized this week in response to steady US data and if the ADP numbers and ISM surprise to the upside the rally in USD/JPY could extend to 103.00. The market is looking for a slightly lower print from ADP at 217K and a slightly higher ISM at 55.6. As always the employment subcomponent of the ISM will be scrutinized heavily for any possible clues to Friday’s payrolls and if the data proves positive the market will start to price in a strong result pushing USD/JPY above the 103.00 well ahead of the release.

Boris Schlossberg
Managing Director

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