FX Market Summary 06-09-2014: Carry Trades Undermine Euro

Trading conditions were more lively than usual on the Monday following a US employment release with the dollar gaining fresh overall support. There were some potentially significant data releases during the Asian session on Monday, although the overall impact was limited. A stronger than expected Chinese trade surplus helped underpin risk conditions which also supprted the Australian dollar. A prominent investment house also raised its forecasts for the currency and AUD/USD moved above the 0.9350 level.

There was a small upward revision to the first-quarter Japanese data while there was a slightly weaker than expected current account surplus for the month with USD/JPY consolidating near 102.50.

The latest CFTC positioning data recorded a further increase in speculative dollar longs to the largest level since early March and the short Euro position doubled which will maintain the potential for further short covering, although markets are unsure how much of this had already been completed following the ECB rate decision.

The Sentix investor confidence index was significantly weaker than expected with a decline to 8.5 for June from 12.8 previously which was surprising and unsettling given the assumption that underlying growth conditions were improving. There was a further shift in Euro-zone peripheral bond yields as Spanish 10-year rates, for example, declined to below equivalent US rates for the first time in over four years. There was increased speculation that the Euro would be used as a global funding currency and this was important in pushing the currency weaker.

Regional Fed President Bullard was generally optimistic surrounding the economic outlook with expectations that unemployment would fall below the 6.0% level later this year. He suggested some re-calibration of monetary policy was possible next year and there was some response in US yields with 10-year yields moving slightly higher to around 2.62%.

After an early failure to break above 1.3670, there was fresh selling and a move to test support below 1.36 early in US trading with the dollar maintaining a generally firm tone. GBP/USD was unable to break resistance in the 1.6840 region and dipped to test support below 1.6800. USD/JPY continued to hit resistance above 102.50 as the yen gained support on the crosses while AUD/USD dipped back below 0.9350.

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