Overnight Headlines

*USD consolidates after Friday’s stunning month-end move

*US stocks closed lower Friday and Asian markets are off to a slow start with holidays in Japan, China and the UK

*Oil runs into profit-taking after gains of over 6% in April

USD is mixed to start the month, after EUR/USD dropped nearly a figure on Friday. This went against most expectations for dollar weakness due to rebalancing flows and was most likely linked to the fall in stocks and positioning a little stretched. USDX is now trading back at the mid-March lows which is the 50% retrace level of its January-March move. May is typically a better month for the greenback on a seasonal basis.

US equity futures are modestly in the green with the VIX heading higher despite the mix of remarkable earnings and macro data. Asian markets are mostly lower with European bourses opening better bid.

Market Thoughts – Potential positive US data to pressure Powell?

After staying patient on policy last week, we may see more market speculation of policy moves and tapering by the Fed as we get key ISM and NFP jobs data releases to bookend the week. Conditions in the ISM manufacturing gauge which is reported on Monday are currently sitting at 35-year highs while Friday’s US payrolls should show another near one million jobs added.

Chair Powell recently noted that it would take a series of months of job creation of about a million a month to achieve the substantial progress required to justify tapering QE. Notably, a headline number of one million job gains would still leave them 7.5 million below pre-Covid levels, so some way off “substantial progress”.

Chart of the Day – RBA could leave AUD exposed

Central bank divergence is a theme which is gaining increasing importance in FX markets as countries and central banksjudge the speed at which they should exit emergency policies on the road to normalisation. The RBA, similar to the Fed, is expected to keep policies on hold at its meeting tomorrow, reiterating that it will not hike rates until inflation is sustainably within the 2% to 3% target range. Inflationary pressures remain subdued as confirmed by last week’s 1.1% reading and even though the jobs market is picking up, the bank may offer clues around the future path and possible extension of its QE program. Any hints of an increase at its next meeting will hurt AUD/USD, while a more rosy outlook on the back of rising iron ore and global recovery hopes will support the aussie.

Technically, the pair has repeatedly struggled to make headway above 0.78 this year and this area offers strong resistance to any move higher towards the February highs at 0.80. A close below support at the 50-day SMA and then 0.7690 would see a retest of the longer-term upward trendline. Global risk sentiment and the next move in the USD leg will be key drivers this week if the RBA offers very little.