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  • The dollar’s resilience has surprised many, been forecast by a few and has broken towards the top of the right shoulder of the H&S on the hourly charts at 97.09 having scored a high of 97.01 today, so far.  
  • Markets factoring in weakness in CNH following downgrades to GDP projections in 2019, strong US data, risks to global growth and geopolitical headwinds.  
  • While the Fed was discounted, markets are reminded that the US economy could perform strongly enough to warrant an additional 0.25% Fed hike in 2019.  

The US dollar is under demand, much to the surprise to many that have been calling for a collapse from 2018 highs in Nov. following the Fed’s switch to dovish/neutral at the turn of the year. Instead, and despite the turn in sentiment, the dollar has been resilient even as risk appetite bounced in recent weeks on diminishing tail risks of Chinese weakness and geopolitics such as Brexit and trade wars.  

However, while we are hearing whispers of various measures that will take place to combat against weakness in global growth by authorities, (such as Chinese), as well as bullish headlines with respect to Brexit and trade deals, there still remains an underbelly of uncertainty – Investors are impatient, going to where they know best, and that is U.S. assets denominated in US dollars.

When coupled with the prospects of a Fed hike, considering how strong some of the data is, such as today’s ISM manufacturing upside surprise and beat (US February ISM non-manufacturing index 59.7 vs 57.4 expected) and when factoring in the possibility of a solid nonfarm payrolls outcome this week, its no wonder that DXY basket and USD/CNH are on the way higher following last nights downgrade to forecasts at the National Peopls Congress for Chinese GDP 2019 from 6.5% to a range between 6-6.5%.  

The DXY is comprised as follows:

  • Euro (EUR), 57.6% weight
  • Japanese yen (JPY) 13.6% weight
  • Pound sterling (GBP), 11.9% weight
  • Canadian dollar (CAD), 9.1% weight
  • Swedish krona (SEK), 4.2% weight
  • Swiss franc (CHF) 3.6% weight

Looking at the top three inputs, today, the euro has sunk to below the 1.30 handle, -0.38% on the day so far, ahead of what is expected to be a dovish ECB, with sharp downgrades in growth and inflation forecasts. USD/JPY is at a crossroads, testing the 112 handle with a bullish Ichimoku Cloud set up. However, the USD appears to be stronger than yield spreads would warrant, by a good 5%, according to analysts at Westpac which is likely pulling at the heals of the pair at this barrier. In Nov, the 10-year yields were up at 3.25% and today, there are just getting above water again, en-route to 2.80%. GBP/USD is down 0.22% but was testing the 1.31 figure with a low of 1.3109, well off the late Feb high of 1.3350, a coin toss on Brexit really – There are little prospects of a breakthrough this week. “While UK Attorney General Geoffrey Cox and Brexit Secretary Steve Barclay are due to have another round of talks on Tuesday evening, the pair are not expecting to make a breakthrough”, a Downing Street source told Bloomberg today.  

Looking ahead

The analysts at Westpac point out that the scale of US economic outperformance has waned considerably from mid-2018. “On a broad trade-weighted basis the USD remains near cycle highs and well above levels one might assume it “should be” trading given the recovery in the risk environment.”

For the dollar to maintain its stance on the leader board, the scale of economic performance will need to pick up considerably, in line with today’s data – However, the Fed will find themselves stuck between a rock and hard place should the US economy continue to accelerate well ahead of the rest of the world. Higher rates could be a toxic mixer for a cocktail of problematic global macro-risks along the way for the Fed and the dollar. On the other hand, should risk appetite continue  to improve and if global growth stabilises, so long as China doesn’t stimulate too much, then one might expect the dollar to eventually capitulate.  

DXY levels

The DXY is above the H&S neckline at 96.60/70 area, testing territory on the way the top of the right shoulder on the hourly charts at 97.09, having scored a high of 97.01 today, so far. A break there opens prospects for a run to 97.30/40/50 38.2% Fibo level, Feb highs and psychological level before 97.64 Nov  2018 tops. A run through there opens risk to the 78.6% fibo up at 99.77. To the downside, below the neckline, the key targets are 95. 57 (50% fibo), 93.84 (38.2%) and 91.69 is the 23.6% Fibo of the Jan 2017 decline.