FX Daily Strategy: APAC, May 5th
Slightly stronger USD favoured on ADP data
Middle East risks suggest equities and riskier currencies vulnerable
JPY weakness against European currencies looks increasingly hard to justify
GBP strength against the EUR is likely reaching its peak
Wednesday sees the US ADP employment data. We expect a 140k increase in April’s ADP estimate for private sector employment, which would be the strongest since a matching gain in January 2025. It would not be quite as strong as a 4-week average of 39.25k in the weekly ADP employment report for the weeks to April 11 implies. We assume some loss of momentum in the week to April 18, the week of the monthly survey, but our forecast is nevertheless stronger than the 116k market consensus. Sensitivity to the ADP data is likely to be modest but our forecast, and even the consensus, suggest a mild upside bias for the USD. Our forecast for the official data is also somewhat stronger than consensus, so we continue to expect some positive USD impact from the data this week.
However, data will probably not be the main driver of volatility through the day, with the focus still on developments in the Middle East. Tuesday saw a generally strong equity market performance with the skirmishes between the US and Iran seen as minor. However, the clock is ticking, and if there is no progress towards a reopening of the Straits of Hormuz the current risk positive market tone is unlikely to last. This also suggests some USD upside bias, particularly against the riskier currencies which have been the better performers in recent weeks, and are already highly valued.
The JPY continues to be the market’s whipping boy, with the impact of last week’s BoJ intervention fading. While the JPY managed a sharp appreciation last Thursday, the underlying market tone doesn’t seem to have changed. While it makes some sense that the USD would benefit if we see some risk negative news, the weakness of the JPY against the European currencies and the AUD looks harder to justify, even if we see risk positive sentiment continuing. However, longer term JPY negative momentum has started to decline, and we would anticipate a JPY break higher in the fullness of time. But this may well require a much bigger turn lower in equities.
EUR/GBP continues to test the year’s lows despite there being little good news emerging from the UK, reflecting the general market preference for higher yielders. However, yield spreads are starting to move a little in the EUR’s favour, with ECB tightening looking more certain that tightening in the UK, and the UK also facing political uncertainty with the upcoming local elections and potential challenge to PM Starmer’s leadership. We would see EUR/GBP levels near 0.86 as likely to provide a good long term buying opportunity.
