US Dollar, Japanese Yen Sold as Risky Assets Rise in Thin Holiday Trade

Key Overnight Developments

• US Dollar, Japanese Yen Decline as Asian Stocks Rise on US Jobs Report
• Australian Inflation Accelerates But Fails to Boost Flat Rate Hike Outlook

Critical Levels

The Euro and the British Pound tracked higher in overnight trade, adding 0.1 and 0.2 percent respectively against the US Dollar as well-supported risk appetite kept the greenback on the defensive (see below). We remain short EURUSD.

Asia Session Highlights

The US Dollar and Japanese Yen tracked lower against all of its major counterparts as stocks advanced in Asian trade, sapping demand for the safety-linked currencies. The MSCI Asia Pacific regional benchmark equity index added 1.1 percent as traders priced in Friday’s better-than-expected US jobs report and its implications for exporters reliant on demand from the world’s top consumer market.

A monthly TD Securities gauge of Australian Inflation showed the annualized growth rate ticked higher to 3 percent in August. The outcome did little for rate hike expectations as the Reserve Bank of Australia gets set to announce monetary policy later this week considering central bank Governor Glenn Stevens has already dismissed recent gains as owing to temporary factors including higher tobacco taxes and utilities prices. A Credit Suisse gauge of priced-in expectations points to no further rate hikes in the coming year.

Euro Session: What to Expect

The economic calendar looks decidedly uneventful and liquidity is surely thin with US markets closed for the Labor Day holiday, pointing toward the likelihood of a relatively quiet session in European trade. That said, illiquid conditions can also produce outsized volatility should something unexpected materialize, so caution is certainly warranted.

Risk appetite looks well-supported with S&P 500 stock index futures up 0.24 percent, hinting the safety-linked US Dollar and Japanese Yen may remain on the defensive against the spectrum of their major counterparts. Much of this looks like carry-over from last week’s price action however, with the potential for a turnaround threatened ahead.

Indeed, as we noted in our weekly outlook, the US Labor Day holiday often serves to mark the timewhen traders return to the markets after the typically low-volume summer months most of them are on vacation. This year, S&P 500 trading volumes dropped 31.4 percent between the end of May and the beginning of September even as prices added 4.8 percent, seemingly undermining the conviction behind the increase. On balance, this may mean that last week’s outperformance was in fact the last gasp of a move soon to be reversed in favor of a renewed risk aversion.

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