Markets in Asia on Wednesday were confronted with the familiar situation of a sharp decline in the Nikkei index. After initial gains, there was a decline of close to 4% in the benchmark index to lows just above 13,000. There was disappointment surrounding Prime Minister Abe’s so called ‘third arrow’ as reform measures failed to meet expectations. The sharp move again triggered defensive yen as the dollar retreated to lows in the 99.30 area and failed to regain 100.
The Australian dollar was again a notable casualty during Wednesday as it failed to capitalise on dollar vulnerability. The currency was undermined by a weaker than expected GDP release as ell as persistently negative sentiment and AUD/USD traded to fresh 2013 lows below 0.9520.
There was some disappointment surrounding the latest Euro-zone data as the final services-sector PMI index weakened slightly from the flash reading, in contrast to an improvement seen in the manufacturing release. There was also a larger than expected 0.5% decline in retail sales and helped cap EUR/USD in the 1.31 area, although the overall impact was limited.
The latest US ADP employment report was weaker than expected with an increase in private-sector payrolls of 135,000 for May following a revised 113,000 gain the previous month. The data dampened expectations surrounding Friday’s pivotal payroll release and also undermined the dollar as the Euro made another attempt at breaking above the 1.31 area.
Failure in this area helped trigger a fresh round of profit taking on long positions, especially with a reluctance to maintain positions ahead of Thursday’s ECB council meeting. There was also some US relief from the latest non-manufacturing PMI release which edged stronger to 53.7 from 53.1 previously and helped to counter pessimism triggered by the weak manufacturing release on Monday. With emerging-market currencies back under some pressure risk appetite remained fragile, but the dollar struggled to gain any support.
For the third successive day, the UK data was stronger than expected with the PMI services-sector index rising to 54.9 for May from 52.9 previously, the highest reading since April 2012. The data reinforced a slightly more optimistic tone surrounding the UK outlook. In response, there was reduced speculation that the Bank of England would make any move to expand quantitative easing at the latest MPC meeting due on Thursday. GBP/USD spiked to highs close to 1.54 and was able to hold comfortably above the 1.53 level even when profit taking emerged, re-approaching 1.54 at the European close as the Euro tested 0.85 support.