Comments from RBA Governor Glenn Stevens, political crisis in Portugal, and new economic data out of Europe and the US is causing a big spike in volatility in dollar-based pairs heading into the July 4 holiday.
It’s been a busy night of trading in the currency markets with wide-ranging moves in both the Asian and European sessions as dovish comments from Reserve Bank of Australia (RBA) Governor Glenn Stevens, concerns over the political crisis in Portugal, and better UK economic data created massive volatility among G10 currencies.
In Europe, crisis in Portugal threatens to dissolve the ruling coalition, which caused a spike in Portuguese yields. Ten-year yields spiked more than 100 basis points (bps) to approach the 8% level.
The resignation of Foreign Minister Paulo Portas rocked the country's equity market, and banking sector stocks fell by as much as 10% on fears that the coalition government could crumble and the country's commitment to austerity measures would come under pressure.
The news sent EURUSD plummeting through the 1.2550 level as renewed fears of a sovereign debt crisis gripped the markets, but the pair recovered into mid-day European dealing and steadied around the 1.2950 figure.
Still, with pressure mounting, the market will seek some reassurance from European Central Bank (ECB) President Mario Draghi. If Draghi fails to allay fears at tomorrow's ECB press conference, EURUSD could break through the 1.2900 handle and test the yearly lows near 1.2800.
An AUD/USD Move That’s Likely Today
Early in the Asian session, comments by RBA Governor Stevens rocked the Australian dollar (AUD), sending AUDUSD to a low of .9050 after Stevens reiterated his view that the country was now transitioning from a commodity boom and the Aussie would need to be lower in order for Australian businesses to compete. Interest rate futures spiked on his words, with markets now pricing in a 60% chance of a rate cut at the next RBA meeting in August.
The unit wasn't helped by weaker-than-expected retail sales numbers, which printed at 0.1% versus 0.4% expected, indicating that final demand is clearly being dampened as growth slows. Over the past three months, retail sales have been essentially flat as consumers tightened their purse strings.
With AUDUSD now within striking distance of the .9000 level, the shorts are likely to try to test that barrier on any US dollar (USD) strength later today.
European Data That’s Not So Scary
Meanwhile, in the UK, the news was considerably more sanguine as the UK PMI services report printed at 56.9 versus 54.6 expected. This represented the fastest rise in activity in nearly two years.
UK economic data continues to show a significant improvement in growth, which is likely to result in markedly better GDP data in Q2 of this year. GBPUSD exploded above the 1.5250 level, bolstered by the data as well as risk-aversion flows on the EURGBP cross.
Today’s Most Important US Data
In North America today, the economic calendar is very busy with both ISM services and ADP jobs data, which will set the stage for Friday's NFP report.
See also: An NFP Preview Due Out Wednesday
USDJPY did a complete turnaround in today’s European session, dropping more than 100 points from the highs, and if today’s US data disappoints, traders may temper their expectations for an early Fed taper, causing USDJPY to tumble through the 99.50 support level as the day progresses.
By Boris Schlossberg of BK Asset Management