USD rally losing momentum

The US Treasury yields came roaring back on Wednesday after a brief consolidation at the start of the week. The nearly 6% rise in 10-year rates drove USD higher against most of the major currencies. However, there is no doubt that USD rally is losing momentum as EUR settles with modest losses and GBP outperforms the greenback.

The US data was also disappointing, raising concerns for Friday’s jobs report. According to private payroll provider ADP, 117,000 new hires were made in February, significantly less than the 177,000 forecast. Service sector activity also slowed with the ISM index dropping to 55.3 from 58.7. The employment component of the report, which has strong correlation with NFPs dropped to 52.7 from 55.2.

Economists were hoping that February would be a better month for jobs. Analysts still expect non-farm payrolls to rise above 100,000; it may fall short of the 180,000 forecast. The prospect of weaker NFPs could weigh on USD, especially USD/JPY whose latest rally took the pair right up to the 100-week SMA 107.25, an important resistance level.

The reflation trade should remain a big story.  There’s room for more upside as vaccines are just being rolled out and the stimulus package is in the works. When all of these pieces fall into place, the reflation trade could gain momentum. Yields can’t rise forever but even with some correction, the path of least resistance should be higher. The US economy isn’t doing poorly, economic activity expanded modestly from January to February.

In Europe, EUR ended the day unchanged versus greenback. ECB sees no need to react drastically to the rise in bond yields according to a report. The sentiment echoed by ECB member Weidmann but he also feels that the central bank could adjust the pace of PEPP purchases if needed. With retail sales in Germany slowing and the composite PMI index revised lower, the rise in yields is a bigger problem for the Eurozone than the greenback. EURUSD has been incredibly resilient and could rally if NFPs miss but in the long run, the EZ lags the recovery which could become a problem for the currency.

GBP traders cheered the UK government’s decision to extend furlough payments until the end of September and Chancellor Sunak’s outlook for a swifter and more sustained recovery. Although, PMIs were revised lower, the aggressive vaccine rollout efforts by UK will pay dividends for the economy in the future.

Meanwhile a strong recovery in oil prices along with this week’s better than expected GDP numbers helped CAD hold onto its gains against the greenback. AUD and NZD weren’t so lucky. AUD shrugged off better GDP numbers in favor of weaker PMIs. Retail sales and the trade balance are due for release this evening. NZD initially saw some strength after the sharp rise in dairy prices but succumbed to USD gains.

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