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We are witnessing the residual impact of Thursday's disappointing non-farm payrolls report on the currency market this morning. U.S. traders basically woke up, looked at the sharp selling of Asian and European equities and the buying of U.S. dollars and decided to join the move.  

Risk aversion continues to hang over the financial markets, driving investors out of high yielding currencies and into the safety of U.S. dollars. The better than expected service sector ISM report should help to restore risk appetite, but risk aversion flows appear to be too strong at this time.  The break of the critical 95 support level in USD/JPY has opened the door for a larger move lower.  The ISM index rose from 44.0 to 47.0 in the month of June, the strongest level since September 2008.  The service sector is crawling back towards expansionary territory which is a good sign since services accounts for 90 percent of the economy.  Nearly all of the underlying components improved but what we found most encouraging is that new orders are now contracting at a slower pace than inventories.  This is the same dynamic that we saw in the manufacturing ISM report and suggests that production could pick up in future months.  

Speculation about a new reserve currency being discussed at the G8 meeting later this week is also cooling.  China’s flip flopping threats about the dollar is more bark than bite, especially since they have been backtracking on their own comments on a daily basis. G8 leaders have no interest in talking down the dollar because now is not the right time to experiment with reserve currencies according to a G8 source.  

Earnings season has begun with Pepsi reporting tomorrow and Dow component Alcoa on Wednesday, but the bulk of the market moving reports will not be released until the week of July 13th ( USD/JPY has opened the door for a larger move lower. The ISM index rose from 44.0 to 47.0 in the month of June, the strongest level since September 2008. The service sector is crawling back towards expansionary territory which is a good sign since services accounts for 90 percent of the economy. Nearly all of the underlying components improved but what we found most encouraging is that new orders are now contracting at a slower pace than inventories. This is the same dynamic that we saw in the manufacturing ISM report and suggests that production could pick up in future months. Speculation about a new reserve currency being discussed at the G8 meeting later this week is also cooling. China’s flip flopping threats about the dollar is more bark than bite, especially since they have been backtracking on their own comments on a daily basis. G8 leaders have no interest in talking down the dollar because now is not the right time to experiment with reserve currencies according to a G8 source. Earnings season has begun with Pepsi reporting tomorrow and Dow component Alcoa on Wednesday, but the bulk of the market moving reports will not be released until the week of July 13th. There will also be heavy U.S. Treasury issuances this month and massive Eurozone bond redemptions which could add pressure on the EUR/USD."> How Will the Dollar Impact Q2 Earnings? ).

There will also be heavy U.S. Treasury issuance this month and massive Eurozone bond redemption which could add pressure on the EUR/USD.

About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.