Archives of “foreign exchange market” tag

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Dollar poised to benefit as China economic growth takes virus hit – Citi

  
  Analysis
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The firm says that the dollar is well placed to benefit from the situation compared to other G-10 currencies in the market

Dollar

Citi’s currency strategist, Adam Pickett, says that “consensus expectations have not yet fully adjusted to the reality of weaker Chinese growth that will result from efforts to contain COVID-19”.

Adding that the market is underpricing the possibility of China’s economy being dealt a blow and overvaluing the prospects of recent stimulus measures. As such, Pickett argues that the dollar stands to benefit and outperform in this scenario.
Noting that the greenback should outperform against open manufacturing economies such as the NOK, NZD and EUR. Although safe havens may perform better, the US economy and key trading partners are “likely to be insulated”, he argues.
Additionally, he points out that market hopes for meaningful Chinese stimulus to ensure a V-shaped recovery are overblown – saying that the current Chinese administration “still prefers slower, sustainable growth than previous cycles”.
This adds to the NAB dollar call earlier in the day here but again, I would say it is conditional upon which currencies you’re looking at and on what scenario.
A highly risk-off landscape would still favour the yen more so than the greenback but against the likes of the kiwi and euro, the dollar definitely will shine if the situation plays out as what is described by Pickett above.

Coronavirus FX implications: The good, the static, & the bad

  
Analysis, Forex
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What to watch for in the outbreak

 3 scenarios for Coronavirus and its FX implications.

“Coronavirus was unknown to asset markets two months ago, may disappear as a factor within a few months, but may also evolve into a major global supply shock if it spreads and intensifies. We lay out the alternative scenarios on how the disease could evolve and what the short-medium term FX responses might be. Our subjective assessment is that current asset market pricing probably lies somewhat closer to the static than good scenarios,” SC notes.

“FX winners (W) and losers (L) under our good scenario where the disease abates:

•   W: CAD, CNY, MXN, KRW, IDR, RUB

•   L: USD, CHF, JPY

FX winners (W) and losers (L) under our static scenario of neither major intensification nor elimination:

•   W: USD, JPY, CHF, MXN

•   L: KRW, TWD, THB, SGD, MYR, AUD, NZD, EUR, CNY, CAD

FX winners (W) and losers (L) under our bad scenario where the disease intensifies and spreads:

•   W: JPY, USD

•   L: KRW, TWD, THB, SGD, MYR, IDR, INR, AUD, NZD, EUR, CNY, CAD,”

It was a big week for the US dollar but one currency managed to hang with it

  
Analysis, Forex
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USD was the top performer this week, GBP lagged

USD was the top performer this week, GBP lagged
The top performing currencies this week help to demonstrate the power of technical support and central banks. It’s no surprise that the high-flying US dollar was on top but right behind it was the Australian dollar.
The main reasons AUD was able to hold up was an improvement in sentiment around coronavirus. The RBA decision also briefly lent support, despite Lowe warning that Q1 GDP was possible.
The final factor was that AUD/USD was springing from support levels at the start of the week. That gave bulls a way to manage risk and encouraged buyers.
The warning sign is that the pair peaked mid-week and broke that support today, at least tentatively. If the extension continues next week, the same technical buying support will quickly become selling pressure and this week’s AUD outperformance could be next week’s underperformance.
AUDUSD chart

“Global standard” gauge of currency misalignment has GBP 22% undervalued against the USD

  
Analysis, Forex
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Here’s a bit of (useful) fun, The Economist’s “Big Mac index” to gauge whether currencies are at their “correct” level against the US dollar.

Its based on the currency valuation model of purchasing-power parity (PPP), i.e. that “in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a burger) in any two countries”.Says the magazine (link here, may be gated(

  • Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible. Yet the Big Mac index has become a global standard, included in several economic textbooks and the subject of dozens of academic studies. 

Some of the results (more at that link)

The Economist's "Big Mac index" currencies US dollar

Markets wake up: Oil drops, gold jumps, yen bid

  
Analysis, Gold / Silver
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Risk aversion kicks in

Risk aversion kicks in
Gold is up $14 in the first minutes of trading while WTI crude has fallen 2.5% to $52.85. S&P 500 futures are down 1%. The US 10-year note future contract is up 11 ticks.
The yen is bid but not as much as I anticipated. NZD/JPY is down 50 pips to 71.69 and is the biggest percentage mover. USD/JPY is down 45 pips to 108.83.
Get ready for a wild week.

US Treasury says real dollar is 8% above its 20 year average

  
  Analysis
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Treasury’s semi-annual report does not list China as a currency manipulator

US Treasury:
  • says currency practices of 10 countries require close attention, but no major US trade partner met criteria for currency manipulation
  • Says China made ‘enforceable commitments to refrain from competitive devaluation’ in phase 1 trade deal withUS
  • says China should ‘no longer be designated as a currency manipulator’ in semi-annual currency report
  • China needs to take necessary steps to avoid a persistently weak currency
  • China also agreed in trade deal to publish relevant data on exchange rates and external balances
  • Says improved economic fundamentals and structural policy reforms would underpin stronger Chinese yuan over time
  • Says continuing to monitor currency practices of China, Germany, Ireland, Italy, Japan, South Korea, Malaysia, Singapore, Vietnam and Switzerland
  • China must take decisive steps to further rebalance economy, allow greater market openness to strengthen long-term growth prospects
  • Switzerland should use ample fiscal space to more forcefully support domestic activity – treasury
  • Japan should enact bolder structural reforms to strengthen domestic demand
  • Germany’s current account surplus remains largest in world, sees urgent need for Germany to cut taxes, boost domestic investment
  • Ireland only meets one of three criteria to be on monitoring list, would be removed in next report if that remains the case
  • Taiwan, Thailand close to triggering thresholds to be added to currency monitoring list
  • continued dollar strength is “concerning” given INF’s judgment that dollar is overvalued on a real effective basis
  • Says real dollar remains about 8% above its 20-year average; sustained dollar strength would likely exacerbate persistent trade, current account imbalances

I wonder if politics played a role in removing the currency manipulator label from China? LOL, I’m kidding. I am not wondering at all.

Treasury's semi-annual report does not list China as a currency manipulator 

US to Iraq: Kick out our military and we will seize your central bank accounts

  
Analysis, Politics
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US puts the petrodollar at risk

US puts the petrodollar at risk
The US warned Iraq that if it kicks American forces out of the country, it would lock the country out of its central bank accounts held at the New York Fed.
Iraq uses the account to settle oil sales of oil and other international transfers.
Iraq’s elected legislature voted last week to expel US troops who were invited to the country to fight ISIS in 2014. The Prime Minister moved forward with those plans this week in a call with Secretary of State Mike Pompeo.
The threat may spark a shift away from US dollar use and pricing in the international oil trade. It could also cause other countries to reconsider keeping money or other financial assets in the United States.
An adviser to the prime minister, Abd al-Hassanein al-Hanein, said that while the threat of sanctions was a concern, he did not expect the U.S. to go through with it. “If the U.S. does that, it will lose Iraq forever,” he said.
In its most-recent disclosures from end-2018, Iraq’s central bank said it held $3 billion in overnight deposits at the NY Fed.

Currencies 2019: “The Year of Low Volatility”

  
Analysis, Forex
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Record low ranges for many of the major currency pairs

If I were to name the currency year, it would be “The Year of Low Volatility”.
Three of the currency pairs had low to high trading ranges that were the lowest since 1980. Even the GBPUSD which had alll the Brexit goings on, had a relatively low range year (the 5th lowest since 2000).
If the low ranges are indicative of non-trending, the good news is non-trending transitions to trending. As a result, I would expect a more volatile/larger trading range for 2020 for many of the currency pairs. Keep that thought in mind in 2020.

Below are the graphical historical ranges for the major currency pairs versus the dollar along with comments about each. .

EURUSD.

The EURUSDh had the lowest trading range going back to 1980
The low to high trading range for the EURUSD in 2019 could only extend to 691 pips.  That was the lowest range going back to 1980. The prior low was 883 pips back in 1996.  In 1997, the range rose to 2280 pips.

The low for the year reached 1.0879. The high for the year was up at 1.1570. The pair is 347 pips or so off the low price and 344 pips off the high price. That puts the pairs price smack dab in the middle of the trading range for the year.  Which way do we tilt in 2020?
GBPUSD

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CFTC Commitments of Traders report: GBP shorts trimmed but not as much as you might think

  
Analysis, Forex
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Forex futures positioning data for the week ended Tuesday, December 10:

Forex futures positioning data for the week ended Tuesday, December 10:

  • EUR short 68K vs 69K short last week. Shorts trimmed by 1K
  • GBP short 23K vs 30K short last week. Shorts trimmed by 7K
  • JPY short 44K vs 48K short last week. Shorts trimmed by 4k
  • CHF short 21K vs 22K short last week. Shorts trimmed by 1K
  • AUD short 37k vs 36K short last week. Shorts increased by 1K
  • NZD short 25K vs 27K short last week. Shorts trimmed by 2K
  • CAD long 21k vs 21K long last week.  No change
The big shifts recently have been paring GBP and NZD shorts. Those trends both continued this week but at a slower pace than you might have expected given the rallies in both. Next week’s data will capture the UK election and that should be instructive.

Cable climbs to highest level since June 2018 as exit poll forecasts big win for the Conservatives

  
Analysis, Forex
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GBP/USD climbs above 1.34 and is perhaps looking at the 1.35 level now

GBP/USD W1 13-12

The pound has surged ahead with a jump of nearly 300 pips on the headline earlier and is now possibly looking towards the 1.3500 level against the dollar next.
Looking at the chart, price is running into some resistance from the 61.8 retracement level @ 1.3453 though so perhaps that may help to limit gains for now.
Going into the exit poll, my bias was that an overwhelming majority should see cable run up the March highs of 1.3381 and the 1.3400 level. I reckon perhaps we could see price action consolidate around these levels amid some retracements over the next hour.
But if anything, keep an eye on resistance at 1.3453 and the key psychological level – 1.3500.
The exit poll has had a prescient track record in recent years but do be reminded that this year the election may be one of the tightest ones yet. As such, we’ll see how the actual results compare and if there is more potential for further moves in the coming hours.
Just remember, it is not over until the fat lady sings (actual results declared).
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