FX Daily: Dollar Retains Strength Ahead Of Payrolls

Uncertainty about the length of the economic downturn has stifled some of the optimism over reopening plans. As a result, the dollar is finding its role as the quintessential G10 safe haven.

USD: Staying bid ahead of NFP

Markets seem to have fully switched from the optimism related to the reopening plans to additional uncertainty about the length of the economic fallout of Covid-19. In this context, the dollar is finding its role as the quintessential G10 safe haven. After ADP numbers showed a -20.2 million drop in employment in April, markets may be reluctant to reduce their defensive USD positions as we head into tomorrow’s nonfarm payrolls release. Initial jobless claims today will be, as usual, closely watched: consensus is centred around a 3 million increase. In the G10, the yen appears to be the best positioned to counter more USD strength, and a material disappointment in tomorrow’s jobs numbers could prompt a break below 105. In the pro-cyclical space, the rebound in oil may provide some shelter to the Canadian dollar and Norwegian krone, while the Australian and New Zealand dollars look more vulnerable, as the impetus from positive Chinese and Aussie trade data overnight may prove short-lived. (UUP) (FXY) (FXC) (FXA)

EUR: Bottoming out, for now

Markets seem to have fully processed the German court ruling from Tuesday, and EUR may face less downside pressure in the last two days of the week, therefore stabilising around 1.08. In the region, the Czech National Bank will announce monetary policy today (at 14.30 GMT): we expect a 50 basis point cut, but no deployment of quantitative easing (more in our CNB preview). The reluctance of the CNB to embark on QE should continue to play as a benefit to the Czech koruna. (FXE)

GBP: Post-BoE rally may be short-lived

The fresh reaction from the Bank of England monetary decision this morning includes a jump in sterling, likely on the back of economic forecasts showing a strong (and in our view too optimistic) rebound in 2021 after the sharp downturn this year. On the policy side, the lack of unanimity on keeping QE unchanged further endorsed expectations that the Bank will have to ramp up its QE programme this summer. The move in GBP this morning hardly looks like the start of a more sustained recovery, as uncertainty around the slow reopening of the UK economy persists (Prime Minister Boris Johnson should unveil the reopening plan on Sunday) and concern around trade negotiations should keep the upside capped for sterling. (FXB)

NOK: No surprises from NB

The recovery of Brent to the 30 $/barrel region has provided some support to Norway's krone as we head into the Norges Bank policy announcement today. A cut is possible, but as the Norges Bank has already provided some monetary stimulus and rates are close to zero, we think a hold is the most likely outcome today. The meeting should have a muted impact on NOK, which may continue to benefit from the more benign oil background, ultimately sheltering it from the generalised choppy sentiment. EUR/NOK may hit the 11.00 mark by the end of the week.