Dollar index down-channel caps USD rally


Dollar index down-channel caps USD rally

· USDCAD bounces after Canadian retail, CPI data

· Sterling sinks as UK PM May speaks to European Union

· Next week may finish with a bang thanks to month- and quarter-end flows

·

Hazy dreams of a ‘soft’ Brexit appear to be receding from view. Photo: Shutterstock

By Michael O’Neill

Sterling has taken it on the chin in New York trading. UK prime minister Theresa May appears to be putting the boots to dreams of a "soft" Brexit as she addresses the European Union, although the speech is ongoing at the time of writing.

USDX capping greenback rally

The US dollar index has been in a steep downtrend channel since April (and a narrower one since July). Numerous attempts to break above the top of the channel (92.50-70) have failed miserably and until a break occurs, reports of the greenback’s resurgence are premature.

The Federal Open Market Committee monetary policy statement and updated projections gave the US dollar ammunition for a sustained rally. It didn’t happen.

The Fed left the door wide open to another rate hike in December, continued to stress that downward pressures on inflation were transitory, and announced the start of quantitative tightening. Recent US economic data have been decent.

FX traders have reacted as if rising US interest rates don’t matter as much as the European Central Bank’s talk that its own quantitative easing programme may start to taper at some point in the future. Eurozone rates are still negative.

Traders don’t seem to care that Brexit is just as disruptive to the Eurozone as it is to the UK. Also, Spain is having serious issues with Catalonia. The Catalan area wants to hold a referendum to split from Spain on October 1. Spain’s Constitutional Court banned the vote.

USDX:

Source: Saxo Bank

War and peace?

FX markets appear dismissive of geopolitical threats. Russia is conducting large-scale war games near the borders of Lithuania, Latvia, and Poland. The games may be a veiled threat to NATO, as it annoyed Russia when it added troops to that same area last February. It’s not like Russia hasn’t annexed neighbouring territories recently, though…

North Korea is a ticking time bomb (H-bomb?) Is President Trump’s taunting of Kim Jong-un akin to poking a starving, rapid cur?

The Middle East crisis is still precisely that. Saudi Arabia bombs Yemen on a regular basis. Syria is a mess. Israel is rumoured to have bombed a site near the Damascus International Airport on September 22, the third attack this month.

China arbitrarily claimed the South China Sea. It has militarised its man-made islands as part of its creeping take-over of the area. Vietnam, the Philippines, Tawan, Malaysia, Brunei, and the US dispute Beijing’s claim.

Anyone of these areas could explode, resulting in a prolonged period of risk aversion.

Sa’naa, Yemen: Powderkegs aplenty mean risk on many fronts. Photo: Shutterstock

The week ahead

It may be a busy start to the week thanks to elections in New Zealand and Germany. New Zealand’s September 23 vote could be the most disruptive, at least for kiwi traders. As it stands, the incumbent National Party is in the lead. If they win, it should be business as usual. If they don’t, it won’t.

Germans vote on Sunday. Welcome back, Angela Merkel.

Monday may be a busy day in Asia. Traders will deal with the fallout (if any) from the New Zealand and German elections. North Korea’s antics will be another source of drama. If not, German, UK and US economics may have to fill the void. New York Federal Reserve president William Dudley is speaking, as well.

Tuesday, The Bank of Japan Monetary Policy meeting minutes are released. New Zealand’s Trade report is also due and Fed dove Neel Kashkari will be speaking during the early hours of the Asia market. The only other event of note is a speech by Fed chair Yellen at 1600 GMT. It should be a non-event as not much has happened since the FOMC press conference.

Wednesday may be off to a slow start in Asia but it will pick up in Europe. UK GDP data may be a big deal following on the heels of PM May’s EU speech. After that, if US Durable Goods and Pending Home Sales data don’t get things going it will be a quiet New York session. USDCAD traders need to pay attention to Bank of Canada governor Stephen Poloz’s speech on Wednesday.

Thursday, The Reserve Bank of New Zealand monetary policy decision is due. Rates are expected to be left unchanged by acting governor Grant Spencer. There is a good mix of data in Europe including German inflation, but traders will be focusing on the US GDP data.

Friday, USDJPY traders will digest a banquet of domestic data including inflation and employment reports. Eurozone CPI data and German employment will be the highlights in Europe. New York trading could get messy around the 1600 GMT fix. It is month-end, quarter-end and Japan ½ year-end. US data includes PCE, Chicago PMI and Michigan Consumer Confidence.

The week that was

Monday started quietly, in part because Japan closed for a holiday. Traders were in wait-and-see mode ahead of Wednesday’s FOMC meeting. In Europe, USDJPY climbed on rising Treasury yields. EURUSD rallied after the Eurozone inflation report. New York was busy. GBPUSD retreated when Bank of England governor Mark Carney appeared to downplay the risk of a UK rate hike due to Brexit concerns. Bank of Canada Deputy governor Timothy Lane injected two-way risk into USDCAD when he said that the Nafta negotiations could become an issue.

Tuesday, “upbeat” Reserve Bank of Australia minutes boosted AUDUSD. USDJPY traders heard rumours that the Prime Minister would call a snap election. EURUSD traded sideways and continued that when in New York while ignoring a slew of economic reports. President Trump had everyone’s attention as he addressed the United Nations. It proved to be a non-event for FX markets. The day ended with the greenback a little worse for wear. US Housing data, Current Account and Import/Export data were ignored.

Wednesday, NZDUSD and AUDUSD inched higher in Asia. Kiwi got a boost from a narrower than expected Current Account deficit and on expectations of a dovish FOMC meeting. Sterling soared in Europe after a stellar Retail Sales report. Oil prices were trading around the $50.00/b level on hopes that Opec extends production cuts. The US dollar opened in New York with small gains across the board. It didn’t finish that way. The FOMC statement and projections were deemed hawkish, and the US dollar rallied.

Thursday, AUDUSD and NZDUSD drifted lower in Asia and Europe and then traded sideways until the end of the New York session. USDJPY retained its post-FOMC gains but didn’t extend them. The Bank of Japan left rates unchanged but had one member dissent. EURUSD found a bottom early in Asia and then drifted higher until the New York close. Sterling traded narrowly until mid-morning in New York and then it soared, rising from 1.3472 to 1.3584. A report that UK PM May would ask the EU for a two-year post-Brexit transition period fueled gains. The Dow Jones Industrial Average winning streak ended at nine.

Friday, a bout of risk-aversion swept through Asia after a report suggested that North Korea would conduct a H-bomb test in the Pacific Ocean. USDJPY recouped half of its losses in early New York trading while EURUSD and GBPUSD traded near their overnight peaks.

GBPUSD:

Source: Saxo Bank

— Edited by Michael McKenna

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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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