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Get ready for the FOMC

  
Analysis, Forex

NZDUSD long on a dovish hand

The last FOMC meeting in June resulted in a shift higher in the USD. The reason was due to the dot plot shift which demonstrated that FOMC board members saw interest rates coming sooner than they had previously. This resulted in some USD strength and chatter that the ‘reflation’ trade was over.

NZDUSD long on a dovish hand

The recent data

Since the last meeting there has been a string of decent data from the US. Core Inflation came in at 4.5%, the highest in 30 years, and the last NFP saw a decent print of 850K. Retail sales rose to 0.6% and the core retail sales were 1.3%. So, the Fed has enough data to see that there has been economic progress.

Substantial further progress?

This is the test that the Fed want to see as Jerome Powell made clear at the semi-annual testimony. . Has there been ‘substantial further progress’. Jerome Powell’s approach is a very dovish one and has maintained the need for easy monetary policy. He has been in no mood to scale back support. In fact Jerome Powell knows full well that the moment he drops his ‘dovish’ stance the market will jump on it in a similar way to the dot plot shift was pounced on in June’s FOMC.

The set up

 

Some details are important here. Firstly, there are no dot plot projections. That is good for the doves and means the markets can’t jump on any marginal shifts towards sooner rates. Secondly, Powell has the floor to himself and can use this to play a dovish hand. That means he can set up a holding dovish position and move the can down the road for August’s and September’s meeting.

 

NZDUSD longs for USD doves

The best looking trade would be a NZDUSD long on a dovish Fed. With all the largest bank in New Zealand now seeing the RBNZ hiking rates in August, NZDUSD longs makes sense if the Fed stay dovish.

FOMC

Offshore yuan weakens to fresh three-month lows, hurt by equities selloff

  
Analysis, Forex

USD/CNH breaches the 6.50 barrier

USD/CNH D1 27-07
The high today hit just over 6.52 as the offshore yuan falls to a low last seen since April against the dollar, hurt by the equities selloff in Hong Kong and China to start the week.
The sharp move in the yuan is likely the cause for some extended moves in FX to start the session, with the kiwi and aussie in particular weaker across the board.
AUD/USD is down 0.5% to 0.7430 while NZD/USD is dragged down 0.8% to 0.6950.
Amid the sharp selloff in Chinese equities, I don’t see officials tolerating a continued drop for too many days. That said, when you put things into context, even with the bloodbath this week the CSI 300 index is still 36% higher than its pandemic low.

Dollar holds more mixed so far on the session

  
Analysis, Forex

Dollar a touch softer on the balance of things but in a mixed spot

The greenback is keeping a mild advance against commodity currencies, though gains have been chipped away with the dollar losing some slight ground against the likes of the euro, pound, and yen so far on the day.
Treasury yields are staying pressured on the session, with 10-year yields down a little over 4 bps to 1.243% currently. Of note, 10-year real yields in the US did touch a record low just below -1.127% so perhaps that is weighing slightly.
GBP/USD is up close to 0.3% to 1.3780, challenging last week’s highs and the 61.8 retracement level of the recent downswing @ 1.3781.
Meanwhile, EUR/USD is taking a look at 1.1800 but is still largely trapped within a narrow range for the time being just below the figure level:
EUR/USD H1 26-07

 

There is minor support closer to 1.1755 that is keeping downside in tact while the 200-hour moving average (blue line) and 1.1800 level are limiting gains for now.

EURUSD has a messy technical trading day

  
Analysis, Forex

Sellers pushing  the EURUSD lower now.

The price action in the EURUSD has been “messy” today from a technical perspective.  The ECB rate decision and press conference helped contribute.  The central bank said that it “would not hike borrowing costs utilities inflation reach its 2% target well ahead of the end of its projection horizon and durably”.   ECB Pres. Lagarde commented that “We did so to underline our commitment to maintaining a persistently accommodative monetary policy stance to meet are inflation target”.
ECB’s Weidmann and Wunsch objected to the length of the commitment and the lack of clarity. Some on the other side wanted to include APP guidance tied to ‘at least’ 2% rather than just a flat 2%. A lengthy discussion was held on whether an inflation overshoot would be incidental over intentional.
Sellers pushing  the EURUSD lower now.
So there is some disagreement and perhaps that is manifesting itself in the price action for the EURUSD in the process.  It certainly seems that way.
Technically, the price action has seen quick, choppy moves higher lower and above and below its 200 hour moving average above (green line) and 100 hour moving average below (blue line in the chart above).
The pair is moving down toward the lows from both Tuesday and Wednesday. The low from Tuesday reached 1.17554. The low yesterday reach 1.17512.  The low yesterday also stalled at a trendline connecting the July 14 lower with the low from Tuesday’s trade.  That trendline currently comes in at 1.17479. A break below would be more bearish.
When you have unresponsive days to the technicals it is an invitation to step away or at the least be very patient (it may also encourage trading failures).
If I were to adhere to the patient idea, the 1.1747 to 1.17554 area would be a buy zone.   Move below and get out or go short and hope for more follow through.
Although the 100 hour MA has seen price action basically ignored, that MA would be a resistance target

Dollar holds firmer to start the session

  
Analysis, Forex

The dollar is not letting up just yet to start the new week

Risk trades may be retracing slightly after yesterday’s sharp losses but in FX, the dollar is still keeping more resilient as we get into European morning trade.
EUR/USD D1 20-07
Commodity currencies are leading losses but it isn’t so much just contained to that space, as the euro and pound are also tracking lower against the dollar.
EUR/USD is contesting a fall below trendline support @ 1.1782 and nears the lows seen on 13-14 July @ 1.1772, which offers a daily support region. Below that, there isn’t much stopping the pair from a sharper drop towards the 31 March low @ 1.1704.
The euro saw a sharp reversal briefly yesterday, possibly amid some unwinding in carry trades, but for now, the dollar momentum is one that is tough to ignore as it is exposing plenty of technical vulnerabilities across multiple charts.

EURUSD trades at lowest level since April to start the trading week. What next?

  
Analysis, Forex

Falls below the low from last week in the process.

The EURUSD as fall below the low from last week and traded to the lowest level since April 5 to start the trading week.  Flows into the relative safety of the US dollar is driving the pair to the downside after an up and down session on Friday.
Falls below the low from last week in the process.
Technically, the price remain below its 100 hour moving average (blue line) at the Asian session highs and got the ball rolling to the downside in the European session.  The pair did reach below the low from last week at 1.17708 to a low of 1.17674, bounced to 1.17807 before running to a new low for the day at 1.17631.
The price has rebounded again and currently trades at 1.17762. That takes the price back above the lows from last week (at 1.17708).
Dip buyers who want to stick their toe in the water would not want to see a move back above the 1.17809 (was the low going back to July 7) – and stay above that level – if the buyers are to take more control. Alternatively, staying below that level in the short term today would keep the sellers firmly in control.

PBOC sets USD/ CNY reference rate for today at 6.4700 (vs. yesterday at 6.4705)

  
Analysis, Forex

The People’s Bank of China set the onshore yuan (CNY) reference rate for the trading session ahead.

    • USD/CNY is permitted to trade plus or minus 2% from this daily reference rate.
    • CNH is the offshore yuan. USD/CNH has no restrictions on its trading range.
 
  • The previous close was 6.4786
  • Reuters estimate was 6.44710 (A rate that’s significantly stronger or weaker than expected is typically considered a signal from the PBOC).
 PBOC injects 10bn yuan via 7-day reverse repos
  • 10bn RRs mature today
  • thus a net natural day for open market operations
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