Dollar pares gains at end of short week (for some) 25Nov16


Dollar pares gains at end of short week (for some)

Michael O’Neill

FX Consultant / IFXA Ltd

Canada

· Just as in the shops, the US dollar is also a bargain today

· The dollar’s pause may be the start of an overdue correction

· A USDX failure to break above 102.16 would suggest consolidation

By Michael O’Neill

A fistfull of dollars on the biggest shopping day of the year? Pic: iStock

Dollar rally may pause

Today is Black Friday in America. It is a post-Thanksgiving tradition that has Americans lining up in front of stores in stores, almost immediately after dessert is served, in hopes of snagging a bargain.

It appears that the US dollar is also a bargain today and although the decline is fairly shallow, there is some evidence that it could be the start of an overdue correction. The US dollar has had a good November. Sterling is the only G10 currency to have gained and that’s because the UK is in its own Brexit universe. The Japanese yen has declined 7.5% since the beginning of the month while the euro has shed 3.65% in the same period.

The bulk of the moves occurred following Donald Trump’s election victory. His campaign promises to quit the TransPacific Partnership on Day 1 of taking office, his threat to label China a currency manipulator, proposed tax cuts and infrastructure spending plans have shredded analyst forecasts for the US dollar, world-wide.

The US dollar index (USDX) is at levels last seen in April 2003. It hit 95.89 during the US election as the results were coming in. It has since roared ahead to 102.12 on Thursday. That price is just below (102.16) the 61.8% Fibonacci retracement level of the entire 2001-2008 range. A failure to break above 102.16 would suggest a period of consolidation is likely. Intraday, a move below 101.30 would extend losses to 100.67 and then 99.75.

Chart USDX monthly

Source: Saxo Bank

EURUSD bears may disagree

On the other hand, EURUSD, which makes up 57.6% of the USDX weighting may tell a different story.

Today’s EURUSD rally may be a selling opportunity. The pending Italian referendum has some pundits believing it would be the end of the Eurozone. Others point out, if not Italy, perhaps the 2017 French and Dutch elections would do the trick. Meanwhile, Turkey is blackmailing the European Union with threats of allowing hundreds of thousands of new migrants into Europe. Turkey officials are irate because the EU held a non-binding vote to freeze EU membership talks for Turkey following the president’s reaction to this summer’s coup attempt. Eurozone political squabbling and dire forecasts are reason enough to fade a EURUSD rally.

Furthermore, the ECB is likely to extend bond buying beyond their March deadline. With all these risks on the horizon, it is hard to see EURUSD making any sustainable gains.

Chart: EURUSD 4-hour

Source: Macro

The week ahead

If the previous week was slow and plodding, this week will more than make up for it. It is chock full of major data, speeches from central bankers, and a month end portfolio rebalancing day. The 171st (ordinary) Opec Meeting on November 30 is poised to be a big deal, especially if the members can agree to meaningful production cuts. If that is not enough, the Italian referendum on December 4 will loom over euro trading all week.

Monday may be the quietest day of the week. There aren’t any data releases in Asia and a speech by European Central Bank president Mario Draghi is the only item of interest in Europe. Draghi’s speech will be parsed for clues as to the ECB’s intentions at the December 8 policy meeting.

Tuesday, Japan retail trade and employment data will be the key event in Asia. There is also a lot of data from the Eurozone and the US.

Wednesday should be very busy due to Opec news, data and month end portfolio rebalancing.

Thursday kicks off the final month of the year with a rash of PMI reports from around the world.

Friday is nonfarm payrolls day. An exceptionally poor May nonfarm payrolls (38,000 vs. forecast 162,000) released June 3, derailed what was expected to be a June rate hike in the US. Could it happen again?

The week that was

It was a short week for American and Japanese traders. It was mostly a boring one for traders everywhere else.

Monday started on a subdued note but not for long. AUDUSD traded softer as did Kiwi but not for long. Profit-takers emerged and the greenback gave back some of the previous week’s gains. EURUSD drifted lower in Asia but bounced in Europe, repeating the pattern during the New York session. Traders were mildly concerned about Wednesday’s Federal Open Market Committee meeting minutes and durable goods data. Sterling got a boost from talk of fiscal stimulus by the UK prime minister. Oil prices spurted higher on rumours that Russia, Iran and Iraq were all making nice, leading to speculation that Opec would reach a production cut agreement. A large earthquake in Japan sent USDJPY lower.

Tuesday saw mild US dollar selling pressure In Asia. AUDUSD and NZDUSD climbed, aided by a boost in commodity prices. USDJPY traded lower until tsunami fears from the earthquake abated. Then it recouped some of its losses. EURUSD was on a small roller-coaster rising, falling and then peaking at 106.57 in Europe. Those gains were erased by lunch time in New York on because of strong US housing data. Oil prices topped out at $49.20 just before the New York open and bottomed out at $47.12 by noontime in New York. Wall Street closed at a record high.

On Wednesday, range trading was the name of the game in Asia and Europe. Aussie and Kiwi drifted higher but the move was reversed during European hours. USDJPY traded choppily within a 110.30-111.30 band. EURUSD traded sideways in a 1.0600-45 range. Sterling traded with a negative bias. That changed in early New York trading. The UK Chancellor of the Exchequer delivered the Autumn Statement and the conclusion was that the new fiscal stimulus measures were good for sterling. Can you say short squeeze? GBPUSD rallied from 1.2360-1.2470 before slipping into the New York close. A far better than expected US durable goods report and strong consumer confidence was like Red Bull to the greenback. (It gave the dollar wings).

The FOMC meeting minutes were released in the afternoon. The reaction was extremely subdued. That was partly because they didn’t provide any fresh information but mainly because most traders had left for their Thanksgiving holiday.

Thursday, the US was closed for Thanksgiving. In Asia, the dollar edged higher due to the strong data seen earlier, during the US session although with lighter than usual volumes. USDJPY climbed from 112.30 to 113.55 but backed off into the European open. It spent the rest of the day drifting slightly higher. EURUSD chopped around within a 1.0540-85 range. Sterling kept a bullish bias while consolidating Wednesday’s gains. Oil prices flat-lined.

Friday, the US dollar gave back some gains on profit-taking ahead of the weekend. US markets operated with a skeleton crew due to the Thanksgiving holiday and their equity markets closed at 1:00 pm EST.

– Edited by Clare MacCarthy

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Author: Loonieviews

In the past 30+ years, I have been an FX interbank market making trader, a high performing FX and Derivatives Sales person, creator of simple and complex risk mitigation strategies and a manager of high performance FX teams. The Trade of the Day is a culmination of that experience. Retail FX traders have access to a well-crafted and carefully researched FX trade strategy designed to generate FX profits while mitigating losses.

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