From NFP to FOMC Minutes

The euro dropped back below the $1.09 level, remarkably shrugging a host of upbeat PMI surveys from the Eurozone and assurances from Athens that Greece will make its repayment to the IMF due this week. The Aussie was the biggest winner following the RBA’s decision to hold rates unchanged, but the USD was the resurging winner, building upon Monday’s gains and erasing all of Friday’s post-NFP losses.

Euro shrugs firm PMIs

The Eurozone March services PMI rose to a 7-month of 54.2 from 53.7 in February, slightly revised down from an initial reading of 54.3. France PMI proved disappointing, falling to 52.4 from the flash estimate of 52.8 and February’s 53.4. Germany services PMI rose to 55.4 from 55.3 flash estimate and 53.7 in February. Italy surprised with a rise to 51.6 from 50.0, including the highest increase in the employment component in nearly five years.

Spain rose to 57.3 from 56.2, revealing the biggest rise in New Orders since July 2000.

UK Services on the run

The UK’s March services PMI rose to a 7-month of 58.9 from 56.7, lifting sterling across the board earlier in the London session. GBP had also been helped by a shrinking differential between the 2 major parties (Conservatives & Labour) as well as the falling share of small parties in voters’ latest intentions according to news polls. A preferred scenario for sterling would be the risk of UKIP losing more seats ahead, but remaining sufficient to form a coalition with the Conservatives. That would be unlikely. A more likely –and less market-friendly outcome– would be a Labour/SNP coalition, whose policies combine a dual threat to an easy fiscal policy and the Union.

RBA holds for now

RBA held rates unchanged at 2.25%, surprising 75% of market expectations for a rate cut. RBA governor Glenn Stevens preferred to keep policy powder dry while awaiting the impact of the February easing as well as the 20% decline of the Aussie over the last 8 months.

The RBA also remained cautious with soaring property prices, which pushed up 40% in Sydney from their 2012 lows. Macro prudential measures have aimed at easing the growth in home loans via tighter lending standards. Such policies would normally justify policy easing only if they prove effective.

The RBA explicitly kept the door open for additional rate cuts, with the “Slowing China” factor and slumping iron ore prices ranking high among the list of growing risks. Aussie traded will closely watch the metal, which accounts 20% of Australia’s export revenues-and China’s latest monetary developments among the key external factors determining the odds for a May rate cut.

From NFP miss to Fed minutes

As currency traders have become convinced that Friday’s release of the March NFP was an aberration, partly caused by bad weather, and offset by higher than expected average hourly earnings, the USD found its bid on the basis that a September Fed hike remained in the cards.

Tomorrow’s release of the minutes from the March Fed meeting could contain their share of downside risks for the greenback. The FOMC statement dropped its “patient” reference, downgraded its view on GDP growth and inflation, as well as reiterating its concern with the strong dollar and international developments. Knee-jerk selling in the USD tomorrow is inevitable, but its duration remains uncertain. The 3-week consolidation in EURUSD failed to regain the 55-DMA, while consistently avoided breaking below $1.0700. Barring any unforeseen event risk from Athens this week, we expect another opportunity for buyers to re-enter near $1.0770s.