Stronger equity markets were the dominant influence in Asian trading on Wednesday with Japanese stocks rising strongly and the Topix index rose to the highest level since July 2008. The correlation between Nikkei index gains and yen weakness was sustained during the session with USD/JPY moving back to the 105 level while there were renewed yen losses on the main crosses.
The Euro-zone data did not have a major impact with a stronger than expected reading for retail sales and German factory orders while there was an in-line unemployment release at 12.1%. The main unemployment data impact is liable to be political as youth unemployment levels continue to increase, but some signs of recovery have encouraged more bullish rhetoric from EU officials.
The dollar continued to perform well into the New York open with the Euro generally on the defensive. EUR/USD retreated back to the 1.3600 area and a break below triggered stops down to the 1.3580 area. The dollar had a robust tone overall with USD/CHF moving above 0.91 while USD/CAD continued to probe levels above 1.08 for the first time since 2010.
The latest US data was also stronger than expected with an ADP employment increase of 238,000 for December following a revised gain of 229,000 the previous month. The data boosted optimism surrounding Friday’s crucial payroll report and also increased expectations that the Fed would sanction a further tapering of bond purchases at the January FOMC meeting.
Initially, the dollar took advantage of the data and increased yield support as EUR/USD dipped to lows just below 1.3570 while USD/JPY again tested resistance above 105. The US currency was unable to sustain the gains and failure to break lower on EUR/USD triggered a forced covering of short positions as dollar sellers stepped in. EUR/USD rallied back to above the 1.36 level later in the New York session as USD/CHF was unable to hold the 0.91 level. There was also caution ahead of the latest ECB council meeting on Thursday which discouraged aggressive positioning.
Sterling continued to take advantage of strong demand indicators despite some reservations over the longer-term outlook while speculation over adjustments to Bank of England forward guidance also failed to discourage bulls. EUR/USD retreated to lows below 0.8270 while GBP/USD was able to find support below 1.64 and rallied strongly to daily highs above 1.6460.