US Dollar Weakness Continues, but USD/JPY Proving Resilient
- Technical structure for DXY Index remains bearish, but fundamentally, the US Dollar may be closer to a bottom.
- Data ahead of the June US NFP report tomorrow has disappointed; ADP and the ISM Services Employment subindex both were weaker.
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Ahead of the June US Nonfarm Payrolls report tomorrow, the US Dollar continues to weaken as leading labor market indicators have turned up somewhat disappointing. The June US ADP Employment report, which moves contemporaneously with the headline NFP figure, missed expectations at +158K earlier, while the June US ISM Services report showed a slower pace of jobs growth in the economy's largest sector.
Overall, the data fit in with the trend of generally disappointing figures for the US economy. The US Citi Economic Surprise Index, a measure of data momentum, currently sits near its lowest level in six years.
Beyond the data, it seems that "Murphy's Law" applies here: what can go wrong has gone wrong. Monetary policy? Markets don't believe the Fed even as it sends strong signals about another rate hike this year; markets are pricing in March 2018 as the most likely period for the next rate hike. Fiscal policy? Legislation for neither healthcare reform nor tax reform looks like it will materialize any time soon.
Amid these developments, one USD-pair has stood clear from the others: USD/JPY. Even as the British Pound and the Euro have rallied back versus the US Dollar, the Japanese Yen remains sidelined. The source may be rising US Treasury yields.
Over the past three weeks, while the US 10-year yield has increased by around 20-bps, USD/JPY has rallied about +450-pips. Concurrently, Gold, which tracks both the Yen and US yields, has broken through support from the January, March, and May 2017 swing lows. Now that expectations for the June NFP report have been tempered after today's disappointing ADP and ISM Services data, any positive aspects of the labor report could be amplified (beating downtrodden expectations) and in turn, push US yields - and USD/JPY - higher yet.
See the above video for technical considerations in EUR/USD, GBP/USD, USD/JPY, Gold, US Treasury yields, Crude Oil, and the DXY Index.
--- Written by Christopher Vecchio, Senior Currency Strategist
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