The US Dollar Is On The March
Axi | Aug 16, 2017 10:50
Originally published by AxiTrader
Welcome to the Forex Today column.
In it, I'll be trying to add a bit more colour and a lot more charts than I do in my broader overnight Market Wrap I do first thing every morning to set myself and my trading up for each day and each week.
h2 RECAP/h2The US dollar is stronger across the board this morning after another bout of data showed that the economy appears to have past the flat spot of weak data flow that was so negative for sentiment toward the dollar and Fed expectations.
It's still early days in the US dollar recovery, and the dollar is yet to push euro down and below the important 1.1680 level. But the signs are there that a turn has begun.
The question of how far depends on continued data flow, this week's FOMC minutes, and the stretched level of positioning in many pairs and the US dollar itself.
So this morning we have EUR/USD at 1.1736, down about 0.4%, USD/JPY has surged to 110.59 - up about 0.85%, and sterling is down 0.75% at 1.2868. The commodity bloc remains under pressure with the Aussie down a little less than half a per cent at 0.7818, the kiwi down 0.7% at 0.7233, and the Canadian dollar is at 1.2753 (USD/CAD) off 0.3%.
h2 HERE'S A DEEPER DIVE - IN A LITTLE MORE DETAIL AND WITH A FEW CHARTS/h2It is too early to declare victory but the beating of the drum that's been sounding for the improvement in US data flow recently grew louder last night after solid retail sales, Empire manufacturing and import and export prices reaffirmed the strengthening trend.
That data reinforces the notion – articulated by NY Fed president Dudley the previous day – that the Fed will announce a tapering in September and is still on track to hike again in December.
And the wash up is that the Citibank Economic Surprise Index for the US again rose. It’s at -25.8 now from -68 a month ago. That's an important recovery.
Equally important for the outlook of the dollar and the EUR/USD specifically is the relationship between that exchange rate and bond spreads. While traders bet that the ECB will announce materially changed policy next month, and while the US data flow was awful euro ran away from implied value based on bond spreads.
The question is can it maintain this gap given that this is a good directional indicator for the cross over the long run. Here's the last 2 years look at that relationship.
My take is it makes the euro vulnerable to negative surprises in the way the US dollar was a couple of months back.
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Looking at the EUR/USD chart specifically last week's lows at the 38.2% retracement level - 1.1680 - are the key to the outlook. I'd also make the case that the rally failed to break back above the very short term uptrend. So the bias is lower. My system is short.
USD/JPY broke higher yesterday as the bounce off the bottom of the range intensified as tensions on the Korean peninsula abated. Add in the stronger US dollar and we get this move back toward the recent congestion zone around 111.
The pound is resting right on support this morning after the inflation data last night suggested that the Bank of England might be right about the outlook for inflation and thus is in no need to rush to raise rates. Headline inflation fell 0.1% in July with the headline rate staying at 2.6% year on year.
Looking at the chart you can see clearly the importance of this level. A break of 1.2600/10 would open the way back toward 1.26.
On USD/CHF if price trades above 0.9775/80 a big surge would be on the cards.
Turning to the dollar bloc now and I have done my usual AUD/USD specific column. It's now under statement to say the 78 region is very important for the Aussie right now.
My system is still long USD/CAD - or at last the trend following portion of my initial trade. USD/CAD is now above last week's high and it is reasonable to look for a target toward the 38.2% of the massive selloff at 1.2940.
And the kiwi was one of the worst performers over the past 24 hours after weak price action and the Dairy auction underperformed positive expectations.
0.7200 is a full round trip and needs to hold otherwise the kiwi is at risk of getting knocked back to very important support - 200 day moving average and trendline - at 0.7100/20.
Have a great day's trading.
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