- Forex today was full of cross-currents with a squeeze in crowded trades following Powell’s less optimistic outlook revealed in last week’s Jackson Hole.
- The greenback remains out of favour on the basis that September’s dot plot could well show some dovish adjustments on the long end which are stripping the dollar of some of its appeal.
It was also interesting to see that the markets are favouring the U.S. in the trade wars, with the U.S. seen to have the advantage where there are clearly deeper risks that may be far more problematic for the US economy than the superficial advantages that have lured investors in so far – The S&P and NASDAQ are both printing fresh record highs. Perhaps, however, this is something Trump acknowledges and the longer he plays China, the more investors buy into the U.S., figuring that Trump has the upper hand. In such a scenario, prolonged trade war angst should be supportive to the dollar considering the implications for higher import prices and how that should force the Fed to continue hiking interest rates – (nullifying the Powel Jackson Hole speech) – coupled with the uncertainty surrounding the NAFTA negotiations and Trump’s handshake deal with Mexico which is now, perhaps, seen to be raising more questions than answers, again, the dollar should prevail.
Currency action
Meanwhile, the DXY was buoyed on US data instead overnight, battling against a bear trend from 94.9120 highs to a low of 93.4340. The Consumer confidence improved in August, rising 5.5pp to 133.4, above expectations (Nomura: 127.0, Consensus: 126.6), and the highest reading since October 2000. The DXY ended the NY session in the 94.70s. The euro was tempered after setting a fresh short-term high at 1.1733, (tighter DE-US spreads and Italy’s economic minister’s EU friendly budget comments helped euro bulls along their way), and the pair closed the North American session at 1.1693. Sterling’s bid through the falling 21-hr SMA up at 1.2875 was shortlived. Cable dropped to as low as 1.2865 from 1.2931 with flows moving into long EUR/GBP which rallied on Tuesday in a breakout from 0.9062 to highs of 0.9098 (piercing through the psychological 0.9090). However, there was a late session flurry in the cross that sent it back to 0.9063 on an unexplained spike of 27 pips. The pair closed the NY session at 0.9085. Typical month-end buying may see a break of 0.91 the figure yet.
As for the Japanese yen, bulls were targetting a break below the 38.2% of the August 22-24 rise at 110.93 again. However, for the time being, the US dollar is buoyed by a rise in yields as markets discount the many uncertainties around global trade and figure that the handshake deal done with Mexico was progress made, and thus, should allow the Fed to continue hiking rates without interruption. Similarly, the U.S. data was bullish and U.S. benchmarks remain robust close to all-time highs. USD/JPY subsequently ended on the 111 handle around 111.20, poised to take on the 30-DMA at 111.30 and the daily Ichimoku cloud higher up at 110.65-111.62.
In the commodities, there are tell-tale signs that all is not well. When looking at both emerging markets and commodities, something is out of whack. The weaker dollar doesn’t appear to be doing any sustainable favours for these spaces, both of which were down in Tuesday’s NY session. This could be a warning to current renewed asset allocations that have been placed based upon a ‘risk-on model approach’ – (The volatility in these correlations are indeed interesting and make for great ST trading opportunities). AUD/USD dropped after claiming a new short-term high at 0.7362 through the 21-D SMA, (0.7338) and closed at 0.7334, despite strong equities and a weaker dollar. The CRB was also falling as were gold prices and copper in North America.
Key notes
US Mexican trade deal update: can’t go forward without Canada’s agreement, may the saga continue
Key events ahead
We have Aussie homes data in Asia and then markets will focus on the second print of Q2 GDP amid a slow session for economic data, where consensus looks for a modest downward revision to 4.0% from the initial 4.1% – Pending home sales are the only other release and are expected to rise 0.3% m/m.
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