Tokyo markets were closed on Monday which curbed liquidity and also made currency pairs more vulnerable to position adjustment. There was still a substantial net short yen position according to the latest CFTC data which will maintain the potential for a short-covering rally. In this context, there was also additional evidence of players trying to trigger stop-losses and push the yen stronger and there was a further initial USD/JPY retreat to four-week lows around 103.25.
European trading conditions were generally subdued which is a common feature of Monday’s trading following the pivotal monthly US employment data. There were also no significant Euro-zone data releases to boost potential activity.
There was further discussion surrounding Friday’s disappointing payrolls report with one camp suggesting that it was an important setback for the economy while another suggested that the data was likely distorted and did not represent a true reflection of underlying conditions. No doubt, a similar discussion is taking place within the Federal Reserve as benchmark US Treasury yields consolidated around 2.85% compared with recent highs just above 3.00%.
EUR/USD held a firm tone at the start of European trading, but was unable to challenge the 1.37 area and retreated to test support below 1.3650 early in US trading. The yen continued to gain support from a decline in US Treasury yields and the Japanese currency also made strong gains on the crosses. EUR/JPY retreated to lows near 140.50 while GBP/USD dropped sharply to lows below 169.0.
Sterling was the main casualty of the day following an initial technical rejection at 1.65 for GBP/USD. Failure to break higher triggered significant selling and, after initially finding support near 1.64, there were lows around 1.6350 in New York as EUR/GBP made fresh gains to a peak near 0.8350. Sterling lost ground despite generally favourable economic survey evidence which continued to suggest that all favourable economic trends have now been fully priced in.
Commodity currencies had a firm tone despite a rally in the yen as cross-related flows continued to have an important impact. AUD/USD rose to highs just above 0.9080, the strongest level for a month, and USD/CAD also corrected slightly weaker to 1.0880 following a fresh four-year high above 1.0940 on Friday.