The US dollar correction higher continues

ADP Nonfarm Payrolls accelerates, boosts US dollar

The US dollar powered higher overnight as safe-haven flows after the ADP Employment data flowed US bond markets, pushing yields lower. The pace of the correction hinting that much of the recent short-dollar positioning was of the fast-money type, which needed few cues to head for the exit door.

The dollar index rose 0.40% to 92.65 overnight; it’s second such gain in a row. This morning in Asia, the index has advanced another 0.20% to 92.84, just shy of its overnight high. A move through 92.87 could signal that a deeper US dollar correction is upon markets, possibly as far as 93.50.

German and French Services PMIs will be published this afternoon, with both indices projected to show substantial gains. With the euro on the back foot overnight, after the ECB’s Chief Economist expressed discomfort about the high level of the currency and its deflationary effect on import prices, weak readings could be enough to push the euro into a deeper correction.

The euro and Australian dollars both suffered 0.50% losses, with the British pound falling by 0.25%, supported by selling in the EUR/GBP cross. That pattern has continued into Asia with EUR, GBP, AUD, GBP and CAD all 0.20% lower amongst the pro-cyclicals. The euro has support at 1.1770, with GBP support at 1.3300 and AUD at 0.7300. A failure of these support zones will signal deeper corrections ahead of tomorrow’s US Non-Farm Payrolls.

Overall, the price action looks corrective, and not structural. The fundamentals driving US dollar weakness are as strong as ever, particularly the overnight fall in US long-bond yields. Bears may have to endure more pain yet into the end of the week, although a positive Jobless Claims figure tonight would alleviate the bearish noise. Tomorrow’s Non-Farm Payrolls data is gaining in importance by the day and will likely dictate how far the dollar correction will run.

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