USD Mixed amid EU Political Uncertainty

USD is trading mixed against the majors - weaker against the commodity currencies (CAD, AUD, NOK, NZD) and stronger against most European FX. Uncertainty arising from elections in Europe saw an increase in risk aversion which is seeing UST yields lower. The decline in Treasury yields is also a result of Fed policy expectations as hopes for QE3 are supported following Friday's weak employment report. Despite the option of QE3 being on the table, we maintain the view that it will take a significant deterioration for the Fed to provide more stimulus. While both risk aversion and QE3 hopes depress Treasury yields, they have adverse effects on the USD. Risk aversion is supportive of the buck as investors seek safety in Treasuries and QE3 speculation weakens the dollar as it suggests the Fed would print more to increase purchases. The dollar index is trading back above the top of its narrow cloud and tested the pivotal 80.00 level. The cloud top, base, and Kijun line all converge around 79.40 to provide key support in the near term.

EUR weaker across the board after weekend elections in France and Greece. French elections were as expected with Socialist candidate Francois Hollande winning the vote while in Greece, the New Democracy won 108 seats failing to secure a 151-seat majority. Now, the ND party has 3 days to form a coalition and if they are unsuccessful then the task falls to the next party, Syriza, and lastly the Pasok party. This raises uncertainty at a time when Greece is expected to adhere strict austerity measures in order to obtain aid from the Troika. On the data front, German factory orders surprised to the upside in March with a m/m increase of +2.2% (cons. +0.5%). EUR/USD fell below the 1.30 big figure to nearly 1.2955 before rebounding to current levels of around 1.3045.The pair remains in a long term bearish channel and the 1.30 daily support zone is looking increasingly vulnerable with today's intraday breach of the level.

JPY is trading softer against most of the G10 currencies after comment from Finance Minister Azumi who said that Japan Is ready to take appropriate action if needed. He said that the JPY rise may be partly caused by EU politics and that Japan is closely watching for speculative moves and is ready to act immediately on the yen if needed. This cause traders to reduce yen longs as the threat of action increases and USD/JPY bounced off of support at the 100-day SMA which is around 79.65. The pair continues to trade in a medium term bearish channel. We are long term bulls on USD/JPY but note that consolidation is likely while the pair trades within its weekly cloud which sees the cloud top around 80.45 and cloud base currently around 78.10.

CHF mostly weaker after Swiss CPI and labor data. The Swiss unemployment rate in April was 3.1% as expected - slightly higher from the seasonally adjusted 3.0% and lower than the unadjusted 3.2% in March. April price data showed yearly deflation of -1.0% (cons. -0.9%) while monthly CPI indicated slower than expected inflation of +0.1% (prior +0.6%, cons. +0.2%). The franc is currently weakest against the GBP while USD/CHF is testing the 100-day SMA around the 0.9200 figure as support.