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Crucial Update : #USDOLLARINDEX #EURO ,#EURUSD ,#USDJPY #GBPUSD #IndianRupee -AnirudhSethi
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rss6 new reasons for a US dollar rally
If there’s a bull case, this is it
The US dollar held a steady bid from Wed-Fri after the Democrats won the Senate and it was the top performing currency after the result became clear.
Could that mark the bottom for the nine-month bear market in the dollar? Or at least a sustained bounce?
The best trade in FX is to always follow the trend, but there is a decent case for dollar strength that hasn’t been told. Here it is.
1) Higher US stimulus will boost growth
The implications for the Democratic win in the Senate are easy to understand. On Thursday Joe Biden will be presenting his proposal for “trillions” in stimulus. If anything close to that gets through Congress on top of the $900B already handed out, it will make for two years of sizzling growth. This week Goldman Sachs boosted its 2021 forecast to 6.4%; a big stimulus package would send that up another notch, pulling 2022 higher as well.
Why wouldn’t you want to invest in a country growing that fast?
2) The US will be among the first countries to vaccinate
The countries with the ability to manufacture vaccines are at the front of the line for doses and the US will be one of the first to vaccinate the bulk of its population and achieve herd immunity. That’s built into GDP forecasts but it underscores that most other countries will lag, including emerging markets which will be a year behind. That relative difference is compelling.
3) Higher Treasury yields
This week’s US dollar move coincided with a 20 basis point move in 10-year yields higher to 1.115%. That boosts yield differentials in the US dollar’s favor on many fronts. I think some of the move this week was on bond hedges and I’m curious to see how the dollar performs when yields stabilize, but the rates market is a spot to watch very closely.
4) Fed expectations are too dovish
The dollar will go wherever the Fed does, and the Fed will follow inflation. Already the talk from the central bank is changing. Less than a month ago they were contemplating more QE or lengthening the average maturity of purchases.
They’ve been strident in forecasting no rate rate hikes into 2024 but that always comes with a caveat about inflation. They have been talking tough about allowing inflation to run hot and looking through temporary climbs but when they’re seeing 3% year-over-year inflation, will they hit the panic button? Their track record for consistency isn’t inspiring.
5) Technicals
I prefer the Bloomberg Dollar Index to the DXY because it’s trade-weighted. As you can see here, it’s challenging the 2018 low after a one-way 14% move since the March high.
That’s a big move.
I don’t think this is a base to build a multi-year dollar bull market but at the very least there’s a case for a bounce. If the DXY is your bag, the chart isn’t significantly different, with the latest bounce coming from within 1% of the 2018 low.
Another spot to watch is USD/JPY. There’s a downtrend from the March highs that’s being challenged. If it breaks, it would be a stronger indication of a retracement phase.
6) Dollar positioning
The consensus has a habit of being wrong. Bank of America’s December institutional investor survey highlighted that selling the dollar was the second most-crowded trade. The CFTC FX data also shows a US$30-billion bet in the futures market against the dollar with euro and yen longs particularly crowded.
Convinced yet? What do you think?
CFTC Commitment of Traders: JPY longs the largest since October 2016
Weekly forex futures positioning data from the CFTC
- EUR long 143K vs 143K long last week. Long position unchanged
- GBP long 4K vs 5K long last week. Longs trimmed by 1K
- JPY long 50K vs 47K long last week. Longs increased by 3K
- CHF long 9K vs 12K long last week. Longs trimmed by 3K
- AUD short 4K vs 7K short last week. Shorts trimmed by 3K
- NZD long 12K vs 13K long last week. Longs trimmed by 1K
- CAD long 14k vs 15K long last week. Longs trimmed by 1K
US dollar edges higher after upbeat comments from Clarida
Treasury yields to the highs of the day
US 10-year yields:
Clarida said the outlook for the US economy is improving and the market sees that as a sign that the 2024 timeline to raise rates is unrealistic.
Clarida coupled it with a comment that tapering bond buyers is ‘well down the road’ but let’s not forget that last month the Fed was talking about buying more bonds so the communication can change quickly.
He’s certainly not leaning against the 20 bps rise in 10-year notes this week. He underscored that by saying he’s not concerned by the levels of Treasury yields.
I think we’ll be finding out if he’s concerned when they hit 1.2% or 1.5%.
With the rise in yields the market is continuing to flirt with buying the US dollar.
The PBOC has (gently) tapped on the brakes of yuan appreciation
Noting some subtle nudges from the People’s Bank of China in recent days and weeks which are indicative of their desire to slow the rate of gain for the Chinese currency but slowing capital inflows:
- yesterday the POBC lowered its macro-prudential adjustment factor for companies cross-border financing – essentially reducing the capacity of domestic companies to borrow overseas (by 20%)
- has curbed financial institution USD borrowing
- raised the cap for local companies to lend to affiliates abroad
Looking ahead the banks has a few other tools in the box, eg:
- increasing the QDII quota for overseas investments
- procedural restrictions on the annual $50,000 quota for residents to buy foreign currencies could be relaxed
US dollar springs to the best levels of the day
Dollar higher across the board
USD/JPY is up a half-cent to a session high of 103.22 as part of a broader US dollar move.
The move higher in the dollar is coinciding with a further fall in tech stocks. The market unsure what the agenda is going to be for Democrats now that they have control of the House. There’s fear they will go after big tech and that’s causing some risk aversion.
At the same time, there is an expectation of more spending. Ultimately that could lead to higher rates if it creates inflation but the market is also unsure how taxes will develop.
This all adds up to a bit of a confused flight to the safety of the US dollar but I don’t expect that to last.
US dollar battles back in early New York trade
The dollar started the year off poorly
Dollar weakness is a consensus trade in 2021 as the trend continues. Oftentimes the consensus is wrong but it wasn’t on the dollar — at least in the first few hours of trading.
The dollar is still near the bottom of the major currency market today (ahead of only GBP) but it’s recouped some losses in the past few hours. Some of that comes with Treasury yields ticking higher.
The first big dollar test will be if US 10s rise above 1%. A break of that is a sure thing if Democrats win both seats in tomorrow’s election.
Dollar continues its struggles into the new year
Dollar slips a little further as we get into European morning trade
The dollar is now down to the lows for the day, easing across the board to start the session. The drop comes as risk is also keeping in a better spot with US futures now trading up by 0.3% as we get things underway.
Cable is up to trade just above 1.3700, breaching the figure level for the first time since May 2018. Meanwhile, EUR/USD has moved back above its 100-hour moving average as buyers seize near-term control in a push to 1.2268.
Elsewhere, USD/JPY is also falling below 103.00 to a session low of 102.94 with commodity currencies posting a modest advance against the greenback.
Going back to cable, the technical picture doesn’t bode too well for the dollar to start the year. The break above the December highs of 1.3619-24 in thin holiday trading has continued and that leaves little in the way of a potential push towards 1.4000.
As mentioned last week, the pound may still find itself struggling despite a Brexit trade deal being achieved but against the dollar, it could still find some upside potential amid the misery in the greenback which appears to be continuing for now.
The USD is the weakest of the major currencies in 2020
The AUD is the strongest
As 2020 winds to a close, the USD is ending as the weakest with the AUD as the strongest.
The greenback fell nearly -9.8% vs the AUD as Australia was relatively little impacted by coronavirus. The rise in commodity prices helped the AUD currency as well. The USD had bouts of flows out of the safety of the USD along with expectations the Fed would be on hold for years. The coronavirus impact was more negative as well.
The CAD and GBP were also weaker on the year, with the GBP suffering from Brexit issues and Covid shutdowns, while the CHF and EUR benefitted from safety flows.
Below is the ranking calculated by taking the % changes of each currency vs each other and cumulating the sums.
The good, the bad, the ugly
The winners and losers among the major currencies space in 2020
Everything that we knew about the year was completely eviscerated in the first three months and this was the year where humanity had to learn to adjust and live with a health crisis, which exacerbated the economic downtrends in recent years.
(more…)A new month, year, quarter, and decade dawns upon us so let’s take a look back at the year in FX and some of the hits and misses in trading this year.
The good
Among the top performers, the Australian dollar is a standout with nearly 10% gains against the dollar this year. The currency pair fell by more than 17% from 9 March to 19 March to the lows for the year, before posting a stunning recovery ever since.
The surge in iron ore prices has also underpinned the currency, which has largely ignored escalating tensions between Australia and China – as the risk rally stays the number one driver in the market to have bolstered commodity currencies this year.
As we look towards the year-end, AUD/USD is now rising past 0.7700 and trading to its highest levels since April 2018. The 0.8000 remains the next key upside target.
Besides the aussie, the euro also deserves a mention in this category as it put on a solid showing with near 10% gains against the dollar itself throughout the year.
The pair had a stunning rise in late February to early March as Treasury yields capitulated and resulted in dollar weakness for the most part, rising from 1.08 to 1.14.
But that all came crashing down as the peak of the virus crisis hit and the pair crumbled to the lows for the year just under 1.07.
Since then, the pair has generally been the go-to trade to short the dollar with the breakout in July towards 1.19 and then the early December break above 1.20 exemplifying the poor dollar performance in the second half of the year especially.
While euro fundamentals aren’t exactly perfect, it is hard to argue against the technical aspect of things with EUR/USD now having much room to roam around 1.20 to 1.25.
Adding to that is other major central banks also cowering and looking towards negative rates, in which the ECB has pretty much reached its limits on that front.
The bad
An easy mention in this category is the British pound. Amid the virus crisis exacerbating economic worries, the Brexit saga didn’t lend much help to the quid throughout the course of the year outside of GBP/USD – which owes to dollar weakness as well.
A double whammy of the virus crisis and Brexit took cable for a nosedive from 1.32 to near 1.14 – a drop of 14% – in the span of roughly two weeks.
But since then, the pair has put up a solid recovery, with the Brexit turmoil during September to October quickly brushed aside as the market bet that a deal will be struck.
Amid thin liquidity this week, cable is attempting a break above its recent highs of 1.3624 as price now trades to its highest levels since May 2018.
It remains to be seen if real money flows will stick with that next week but despite the relief from a Brexit trade deal, UK economic prospects continue to look dim and this will be more clearly reflected against other major currencies outside of the dollar.
The volatility in the currency amid the whole Brexit debacle is also worth mentioning, with price action pretty much dictated by media journalists and Twitter posts during key moments and that made it tough to read into the market at times.
A secondary mention in this category is the Canadian dollar. It wasn’t so much so the loonie’s fault but more so the capitulation in oil prices that proved to be a major drag for the currency – especially in Q1 trading.
Since then, the loonie has put a modest showing but gains aren’t anything that really stands out as the market kept the focus on more key currencies throughout the year.
That said, the descend in USD/CAD from 1.46 to 1.27 is keeping in tune with the dollar slide as of late and the break below 1.30 and the December 2019 low is putting sellers in a good spot as we look towards the new year.
The ugly
Among the major currencies, there’s only one real mention in this category and that is the US dollar. It has been a year where the greenback has turned from being the most sought after during the ‘sell everything, buy dollar’ response back in March, to ‘buy everything, sell dollar’ mode that we are getting into looking towards 2021.
A lot of this owes to the Fed’s response to the virus crisis and the introduction of swap lines helped to ease liquidity pressures on the dollar while the printing press working overtime pretty much gave the green light for risk assets to rally hard.
They pretty much turned the market narrative, leaving investors and traders to put aside the question of “what about the economy?” to stick with “who cares about the economy?”. And that is arguably the key takeaway in the market in trading this year.
Among other mentions in this category is the Turkish lira, Brazilian real, and Argentinian peso. The former had to deal with central bank and political instability, not helped by dwindling FX reserves as well as a rush to the exits in Turkish bonds and stocks.
Meanwhile, the latter two declined by more than 20% against the greenback this year with Brazil arguably having a poor response to the virus crisis while the ARS, well, continues to just be the ARS as tough capital controls continue to spark plenty of demand for the dollar in the black market amid widespread angst about devaluation.
Special mentions
The king of the G10 space this year deserves a mention in this spot. With gains of over 14% against the dollar, the Swedish krona takes the crown, benefitting from a different approach from the Riksbank and the government in dealing with the virus crisis.
There was no draconian lockdown by Sweden when dealing with the health crisis and while that is still up for debate, the Riksbank stayed away from tweaking its benchmark interest rate (0%) while only making minor changes to its lending rate to stimulate the economy.
While not really FX per se, there are two other assets in the market deserve a mention for 2020 as well in my view. The first being silver, which has been among the standout performers this year in the commodities space.
Although iron ore pipped silver in terms of year-to-date gains, the gains in silver this year has been nothing short of stunning with over 48% gains – nearly doubling that of gold throughout the course of the year.
Gold on its own is also set for its biggest jump in almost a decade, so its supposedly “poor cousin” has certainly had a magnificent 2020 all things considered.