The US dollar rally is taking a bit of a breather after world equity markets rallied and Eurozone officials reached an agreement to ensure that new bailout funds will be provided to debt-stricken Greece.
It has been a quiet session to start off the week with high-beta currencies firming a bit in the European session. Equities rallied and the European Central Bank (ECB) announced that the Troika reached an agreement on policies needed to keep the bailout program on track in Greece. The EURUSD climbed steadily throughout morning European dealing, reaching 1.2845 after earlier attempts to run the 1.2800 level failed.
In economic news, German trade surplus missed its mark, coming in at EUR 14.1 billion versus 17.4 billion expected. Exports sank by -2.4% while imports rose 1.7% on a month-over-month basis. The figures from the month prior were revised lower as well (EUR 17.5B from 17.7 billion). Although the market disregarded the news, the decline in German trade will not bode well for growth in the Eurozone's largest economy and suggests that demand for the country's critical export sector may be cooling in the second half of this year.
The fundamental data was overshadowed, however, by the firmer risk sentiment from the equity markets and the news out of Greece, which is now more likely to receive further bailout funds and avoid yet another financing crisis in the region.
Crucial Fed News Due Wednesday
In Asia, USDJPY initially climbed to a high of 101.51 on retail demand at the start of Tokyo trade, but the pair later sold off to 101.00 on the drop in the Nikkei, only to recover back towards the 101.40 as the European session progresses. The pair received a tremendous boost from Friday's US non-farm payrolls (NFP) report, which beat the 165K jobs estimate by printing at 195K.
This was the first time in more than a decade that NFPs have generated more than 100K jobs for 12 consecutive months, a trend that indicates the US economy is starting to build serious momentum.
Market consensus is that the Federal Reserve will begin to taper as early as September, and all eyes will be on this Wednesday's Federal Open Market Committee (FOMC) notes as traders look for clues from some of the more hawkish members of the board. Even if the Fed remains stationary for a while longer, US yields are likely to rise in anticipation of growth, and that should prove constructive for the US dollar (USD).
See related: 3 NFP-Inspired Dollar Trades
The US Treasury/German bund spread is already at seven-year highs, and if it continues to expand, the dollar rally should continue with EURUSD likely testing the yearly lows at 1.2700 and USDJPY testing the yearly highs at 103.50.
With no major reports on the economic calendar today, currencies could remain range-bound for the rest of the day. Although all the high-beta currencies have staged mild rebounds in today's session, the rallies may be short lived this week, especially if US data produces any upside surprises and Eurozone news continues to disappoint.
By Boris Schlossberg of BK Asset Management