Option expiries for today’s NY cut 1000ET

* EUR/USD: 1.1000 (EUR 1.8bn), 1.1050 (EUR 1.7bn), 1.1100 (EUR 1.7bn), 1.1150 (EUR 1.0bn),
1.1200 (EUR 1.73bn)
* USD/JPY: 119.50 (USD 394mn), 120.00 (USD 2.14bn), 120.50 (USD 510mn), 121.00 (USD 1.73bn)
* EUR/JPY: 132.00 (EUR 462mn)
* GBP/USD: 1.5400 (GBP 236mn)
* EUR/GBP: 0.7270 (EUR 212mn)
* AUD/USD: 0.7800 (AUD 2.7bn)
* NZD/USD: 0.7525-30 (NZD 1.0bn)

(Source DTCC)

USD price action: A deja vu – Goldman Sachs

The dovish FOMC surprise this March is casting a shadow over the Dollar, similar to a year ago. The last time the FOMC damaged conviction, when a “hawkish” dot plot in March 2014 was followed by “dovish” minutes in April. At the time, the Dollar fully unwound what were the makings of a rally and remained in the doldrums until mid-2014.”

“In the aftermath of a dovish Fed surprise, are we cruising for a repeat? We think not. After all, the unemployment rate is a lot lower now and there is a reasonable chance it could approach the Fed’s NAIRU estimate (5.1%) at some point over the summer. Friday’s payrolls report is especially interesting in that regard, because our expectation for solid jobs growth (230k) could come with sizeable back-revisions: on average since 2010, the average 2-month revision in April is 74K, with the smallest being 36K.”

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Risk-Reward Into NFP:

With lift-off approaching and market pricing at the dovish end of the spectrum, we think this is a good time tactically to re-establish Dollar longs. Ahead of Friday, our favorite expression of Dollar strength is versus the Euro and then the Yen.

EUR/USD, USD/JPY Forecasts:

We continue to have high conviction in EUR/USD downside (our 12-month forecast remains 0.95) and USD/JPY upside (a 12-month forecast of 130).

FX morning briefing

EURO SUMMARY: Euro-dollar opened in Asia at $1.1347 this morning, toward the upper end of the $1.1175 to $1.1370 range seen yesterday, with higher bund yields, Greek optimism, softer US economic data and a slightly dovish Fed Lockhart all combining to push the euro higher. The pair however failed to extend the overnight highs and slipped off the early peak of $1./1349 in Asia today. Euro-yen selling interest weighed on euro-dollar and the pair then traded a $1.1325 low as Japanese stocks dragged most yen pairs lower. The move lower in euro-dollar then unveiled demand interest off the low, which was subsequently followed up with covering of euro shorts vs other Asian FX. Euro-dollar gained momentum on that and recovered back to the opening levels though it has yet to threaten the morning highs. Euro-dollar last trades at $1.1345. German factory orders out later in the European session the next hurdle for the Euro. Hourly support lies at $1.1315, topside resistance is located at $1.1380 (February 26 high).

EUR/USD: Recent pressure on the 21-WMA and 100-DMA resulted in a sharp break higher with focus having shifted to the $1.1451-1.1540 region where Feb highs are located. Key concerns for bulls continue to come from O/B daily studies and the Bollinger band top. In saying that, layers of support have developed with bears needing a close below the 100-DMA to ease bullish pressure and below $1.1066 to hint at a more substantial correction.

YEN SUMMARY: Dollar-yen opened in Asia at Y119.46, toward the lower end of the Y119.21 to Y120.05 range witnessed by European and US markets, weaker US economic data weighing on the US dollar. The ‘Golden Week’ holiday season ended yesterday and the return of the Tokyo market today saw Japanese stocks drop sharply in the early half of the day. The Nikkei 225 stayed weak through the morning and dragged dollar-yen lower, the pair eventually falling to a Y119.33 low. Demand noted earlier at Y119.30 successfully contained the losses and sparked a recovery as aussie-yen also rebounded off its post-jobs data lows. Dollar-yen rallied to a new session high of Y119.60 before easing again late in the session. Dollar-yen last trades at Y119.48. There’s been some talk of stops in the Y119.10/00 region, the latter also seen containing a $1.4bln expiry, before further demand interest is then seen at Y118.80 and Y118.50, according to traders. Up top, initial resistance lies at Y119.70, which is the 38.2% fibo retracement of the Y120.51 to Y119.21 fall.

USD/JPY: Bears are feeling a little more confident following Wednesday’s sell-off that saw a dip below the 100-DMA before closing below the 21-DMA (Y119.54). The Y119.69-84 resistance region is now key with bears needing a close above to ease the current bearish pressure and shift immediate focus back to Y120.50-86. While Y119.84 caps bears now focus on a break of Wednesday’s low that sees Y118.4-50 targeted with the Bollinger base noted just above.

EUR/JPY: The first close above the 100-DMA since early Jan adds support to the bullish case with focus now confirmed on layers of resistance Y136.26-137.67. In saying that, O/B daily studies remain the key concern for bulls. Bears now look for a close below Y134.02 to confirm a false break of the 100-DMA and easing bullish pressure. Overall a close below Y132.92 is needed to end bullish hopes and shift focus back to 21 & 55-DMAs Y130.40-85.

AUSSIE SUMMARY: The aussie opened in Asia at $0.7969, toward the middle of the $0.7919 to $0.8031 range seen yesterday, the bid theme in Asia spilling over into European and US markets, a widening of the Aussie/US 10 year yield one factor for the short squeeze. The spotlight this morning was on the Australian jobs data, which were released at 0130 GMT. Ahead of that, aussie-dollar was already under pressure and traded down toward $0.7950 as regional stock market saw a soft start to the day. A weak headline jobs number drove aussie-dollar sharply lower to a $0.7925 low before the market then noticed the favorable revisions in previous readings. That sparked a bounce back over $0.7950 and then on to $0.7970. That bounce put a squeeze on some short positions and aussie-dollar then extended the recovery through $0.8000 for a high of $0.8005 before the move fizzled out. It last traded at $0.7989. Traders have cited macro sell orders above $0.8000, with resistance seen at $0.8031 (May 6 high), and stops then seen above $0.8040. On the downside, stops are tipped below $0.7920 and support is located at $0.7909, which is the 50% fibo retracement of the $0.7788 to $0.8031.

STERLING SUMMARY: Cable closed in NY Wednesday at $1.5247 after rate had further extended its recovery from a pre UK svcs PMI release low of $1.5150 to $1.5291, the move driven by the sell off in bonds, dollar sales leading the move with the euro the main beneficiary. Cable dipped to $1.5221 before it recovered to $1.5267 during the US afternoon then settled between $1.5240/55 into the close. The lead rally in euro-dollar saw euro-sterling drive through recent highs of stg0.7420 to stg0.7449 closing the day at stg0.7433. Another Asian session of consolidation, following a volatile Europe-US session with cable trade contained by $1.5230/47(trading around $1.5240 into Europe) with euro-sterling contained by stg0.74385-0.7443. General Election in the UK today though exit polls/results only due after 0900GMT this evening. Opinion polls still see a very tight result making for political uncertainty. UK new car registrations provides domestic data interest though focus on US weekly jobless claims (1230GMT) ahead of Friday’s key NFP. Bond market action remains key. Cable resistance into $1.5250, stronger between $1.5290/1.5300. Support $1.5230/20, stronger toward $1.5200. Euro-sterling resistance into stg0.7450, support stg0.7420-00.

GBP/USD: The 100-DMA is now seen supporting following the recovery from below this level earlier in the week with immediate focus on the $1.5298 resistance level. Bulls continue to look for a close above $1.5298 to reconfirm overall focus on the $1.5500-55 region. Bears now need a close below the 100-DMA to ease bullish pressure and below the 55-DMA ($1.5038) to end bullish hopes and shift overall focus back to 2015 lows.

Euro defies gravity

The rally in the euro seen in the last three weeks has exceeded most traders’, even the rare euro bull’s, wildest imaginations.

Now, as the market digests the sell-off in German Bunds and European stocks, such as the DAX, and the ensuing unwinds of euro shorts put on as hedges, even die-hard euro bears were starting to pencil in a higher euro in the near-term.

The euro was trading at $1.1357 Wednesday, on the high side of the day’s range of $1.1185 to $1.1368. The earlier high was the highest level seen since February 26, when the pair topped out at $1.1380, seen as initial resistance.

Given last week’s decisive break over $1.1052, the March 26 high, market players saw the euro as moving into a $1.1000 to $1.1500 in coming sessions, with scope for a possible overshoot to the topside.

“Last week we noted the upside movement in EUR/USD and the likelihood that reduced USD exposure would bring some selling of U.S. fixed income, particularly Treasuries, a market in which some investors likely took exposure simply to get exposure to the rising USD,” said Bob Sinche, global strategist at Amherst Pierpont Securities.

Amherst Pierpont has been arguing for the euro to move back into a new $1.1000 to $1.1500 trading range, he noted.

Earlier, the euro vaulted its 100-day moving average, currently at $1.1259, as well as $1.1292, the 23.6% Fibonacci retracement of the decline from the May 8, 2014 highs near $1.3993 and the March 16 lows near $1.0458. Wednesday’s decisive break above $1.1292 suggested scope for a move to the 38.2% Fibonacci retracement, which comes in at $1.1808.

“We would view a rise to the $1.18 level a short-covering overshoot and a level at which to re-sell EUR/USD,” Sinche said.

On the day, with German Bunds and the DAX seeing renewed selling earlier, there was newfound demand for the euro as FX hedges were unwound.

The euro tripped off stops in the $1.1290-$1.1300 area, with extension to the day’s highs near $1.1368. With the pair maintaining a toehold over $1.1300 in afternoon action, traders looked for the test of the February 25 and Febuary 26 highs at $1.1389 and $1.1380 respectively, which if broken would target at test of the Febuary 19 peaks near $1.1450 and then the psychological $1.1500 mark.

While bullish in the near-term, bigger picture players were looking at entry levels for a euro short position.

We came down so quickly,” observed one U.S. trader, noting the euro’s 25.3% decline from $1.3993 a year ago to the mid-March lows near $1.0458.

The sub $1.1000 levels seen in March and April were likely a temporary overshoot, driven by expectations of what European Central Bank QE would do to eurozone yields.

More recently, as German Bund and other eurozone yields have moved higher, traders have rethought their euro view.

Analysts warned to keep an eye on both U.S. Treasury and German Bund yields as well as European stocks.

Ten-year U.S. Treasury yields held at 2.242% Wednesday afternoon, up from the 1.896% low seen April 27, as well as the 1.809% low seen April 3.

Ten-year yields were within striking distance of 2.2575%, the high yield seen March 6, in the wake of a 295,000 increase in February U.S. non-farm payrolls. If 2.26% gives way, the focus will be on 2.347%, the high yield seen December 8, the Monday after another upbeat U.S. non-farm payroll release.

Ten-year German Bund yields last traded at 0.584%, down from an earlier high of 0.5977% and well over ten times higher than the 0.0485% record low yield seen April 17.

The German DAX closed up 0.2% at 11,350.15 Wednesday. At the close, the DAX was down 8.4% from the life-time high of 12,390.75, seen April 10, and up 15.8% year-to-date.

“With bonds, QE in the U.S., UK and Japan drove rallies pre-announcement and either range-trading or sell-offs afterwards,” said strategists at JP Morgan.

In terms of FX effect, “currencies tended to decline into QE announcement and recover or consolidate thereafter,” they said.

In the first quarter of 2015, ECB QE looked to be “unfolding unlike the Fed, BOE and BOJ programs,” the strategists said.

“Rather than consolidate or turn higher in late January once the ECB announced its program, German Bund yields and the euro continued to decline, prompting rather breathless claims about how different the ECB’s program would be because of such low net bond issuance in the Euro area,” they said.

While ECB QE “was the most aggressive in history when measured by aggregate purchases relative to supply,” at the same time QE was  “coming during an upswing in the business cycle, and belatedly, when Bunds looked extraordinarily overvalued and EUR/USD historically undervalued on our preferred models,” the strategists explained.

“So strategy since QE announcement was less aggressive than the issuance story might normally suggest, simply because fixed income and FX valuations were terrible,” they said.

JP Morgan warned that further unwinds may be seen before the dust settles and fundamentals can be traded again.

“ECB QE has further to run and its dampening effects on rates, volatility and the currency will reassert themselves eventually, but those aren’t the trades to have on at this stage of the QE cycle,” the strategists said.

In the near-term, the euro will take its cue from overall dollar direction as market’s react to Friday’s release of U.S. non-farm payrolls.