FX Market Summary 04-01-2014: Dollar Stays On The Defensive

USD/JPY gradually pushed higher on Tuesday in response to more favourable risk conditions and fresh concerns surrounding Japan with a challenge on resistance above 103.20. The latest Tankan index was weaker than expected with a marginal increase to 17 for the first quarter from 16 while non-manufacturing confidence was unchanged. There were further concerns that the sales tax increase would damage the economy, especially with a sharp decline in the expectations component which will increase pressure on the Bank of Japan for further monetary action.

As expected, the Reserve Bank of Australia left interest rates on hold at 2.50% following the latest policy meeting. The bank was slightly more optimistic over the outlook, but also warned that a firmer currency would have some negative impact. AUD/USD briefly moved above the 0.9300 level before encountering significant selling pressure and retreating back towards 0.9250.

While there was immediate relief surrounding the official Chinese PMI figure of 50.3 for March from 50.2 previously, the underlying picture suggested further vulnerability as debt fears also continued to simmer which provided little encouragement Australian dollar bulls.

There was a raft of Euro-zone data which did illustrate medium-term divergence within the area. German unemployment fell by a further 12,000 over the month which took the rate to 6.7% while Italian unemployment increased to the highest level since 1977 at 13.0% as Euro-zone unemployment as a whole held at 11.9%. The final PMI indices confirmed the picture seen in the flash data with further downward pressure on prices.

The latest UK manufacturing PMI data was weaker than expected with a decline to an eight-month low of 55.3 for March from a downwardly-revised 56.2 the previous month. Although still broadly solid from a longer-term perspective, the data reinforced doubts surrounding the underlying performance, especially with exports at a 10-month low. From challenging resistance levels above 1.6650, GBP/USD was pushed sharply lower to test support before finding buying interest ahead of 1.6610.

EUR/USD was able to resist any test of significant support levels and pushed higher again to test resistance in the 1.3800 area in early New York with the dollar still unsettled by Dovish talk from Fed Chair Yellen on Monday. The ISM manufacturing index did register an improvement in the month to 53.7 from 53.2 previously even though it fell short of expectations. While production increased strongly, the employment component was disappointing ahead of key payrolls data later this week.

EUR/USD did hit selling interest above 1.38, but with only very limited retracements while USD/JPY hit resistance above 103.60.

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