The yen moved back to centre-stage on Monday with another session of high volatility led by changes in the Nikkei index. An upward revision to Japan’s latest GDP data helped spark strong gains in the Japanese benchmark index with a daily gain of close to 5% as Japan also registered a stronger than expected current account surplus.
Strengthening risk appetite triggered by the Nikkei move helped push the dollar initially to near 98.50 against the yen and the pair extended gains to a peak above 99.20 during the New York session as the Japanese currency also lost ground on the major crosses.
Emerging market currencies were also an important focus of attention as the Indian rupee retreated to record lows against the US dollar with the South African rand also under pressure.
The Australian dollar was a major mover during the Asian session as AUD/USD dipped to fresh 31-month lows at 0.9400 before a limited technical recovery. Long-standing unease surrounding the economic outlook intensified following the weaker than expected Chinese data over the weekend. The latest industrial production and export data were below expectations and contributed to fresh downward pressure on industrial commodity prices which pushed the Australian currency weaker.
Sharp moves in the yen and Australian dollar did not translate into wider volatility across the European pairs. Trading ranges on Mondays following the US employment report are historically one of the narrowest and there was no exception this time round. EUR/USD found support on dips to the 1.3180 area with resistance on approach to 1.3230.
The latest IMM positioning data recorded a decline in the net dollar long position from five-year highs the previous week, but there was still a substantial net long position. Traders are uncertain how many long positions were subsequently knocked out by the dollar’s sharp correction last week and there was a reluctance to take aggressive positions.
A slightly disappointing Euro-zone business confidence reading and a worse than expected reading for Italian industrial production was offset by stronger French data and failed to break the temporary equilibrium.
Regional Fed President Bullard stated that monetary policy was being buffeted by a combination of improved growth and weaker inflation. He stated that weak inflation could justify the prolonging of quantitative easing which does suggest that the Fed would prefer to start winding down the programme, but remains uneasy over the risks of such a move. There was an increase in benchmark 10-year US Treasury bond yields to just above 2.20% which helped protect the dollar from wider selling pressure as EUR/USD settled near 1.32.