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Australian Dollar May Leave Its US Cousin To Make The Weather



Australian Dollar May Leave Its US Cousin To Make The Weather

Fundamental Australian Dollar Forecast: Bearish

  • The Australian Dollar may lack clear domestic drivers this week
  • If so that will leave the US Dollar resolutely in charge of direction
  • That may well mean the Aussie heads lower, if not necessarily very far

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The Australian Dollar faces a week rather short of likely economic cues, with the March monetary policy meeting from the Reserve Bank of Australia now safely behind us.

Last week the RBA left the key Official Cash Rate alone at the now-venerable 1.50% record low which has endured since August 2016.What’s more it certainly didn’t sound like a central bank in any hurry to raise interest rates as it wrestles with stubbornly low inflation and high consumer debt. This of course puts in in marked contrast to the US Federal Reserve which is thought likely to raise its own cost of borrowing once more this month, and to do so again at least twice this year.

It also perhaps makes it harder for Australian economic data to really move the currency given that any change in the monetary outlook is clearly going to take a bit of time.

Still, interest rates alone don’t decide where the Australian Dollar goes and a revival in risk appetite following signs of nuclear rapprochement between the US and North Korea may prop it up.

The week is also not entirely devoid of Australian economic news either. Investors will get a look at a well-respected survey of business confidence from the National Australia Bank on Tuesday. That will be followed by another, on consumer confidence, from Westpac on Wednesday. The housing market is never far from Aussie-dollar investors’ minds and there’ll be a look at that too, in the form of official home-loan data.

However, while all of the above may provoke some immediate, binary trading reaction depending on how they go, the US Dollar is likely to keep running the AUD/USD table overall. And the Aussie remains stuck in a clear if gradual downtrend against its US rival, one which may have just seen another upside attempt fail at the highs of March 7.

Given the marked lack of obvious looming reasons why that downtrend should break –either fundamental or technical- it’s a bearish call this week for the Australian currency.

Australian Dollar May Leave Its US Cousin To Make The Weather

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If You Build It, Will They Buy? A Demand Led World




Fundamental Factors Focus:

  • US optimism peaking, which may mean the risky asset rally has further to run
  • Aggressive supply of base metals, energy is increasingly dependent on global demand picture
  • Signs of a ‘dollar shortage’ that aligns with risk off markets remain absent

Capital flows, business activity, a premium of borrowing costs, and consumer confidence are foundational components of an economy that sees investors rushing into risky assets, and shying away from investments that don’t capture the upside.

Optimism Reigns Stateside

Two data points have recently moved to extremes not seen since the kick-off of the Regan economic boom in the early 1980s that saw interest rates and inflation drop alongside tax cuts enacted that boosted confidence and productivity.

3 Measures Of Economic Activities Hitting Multi-Cycle Highs, Recession Unlikely

Please add a description for the image.

Data source: Bloomberg, Chart created by Tyler Yell, CMT

The first data point, the Institute for Supply Management (ISM) Manufacturing Business Survey just aligned with the NFIB small business optimism index to hit levels not seen in years. For the Small Business Optimism Index, it recently reached the highest level since 1983 where the ISM hit a 13-year high last month.

Friday morning also saw a 14-year high of the University of Michigan Consumer Confidence reading with an all-time high with the current conditions gauge that measures American’s perception of their personal finances hitting an all-time high.

What is worth noting in both cases is that both in the early 80s, and ISM in May 2004 was seen at the early- to mid-point of an economic expansion. Should a similar development be in place, traders should keep their low-probability high-impact scenarios saved for their NCAA March Madness Brackets, and the high-probability mid-impact events applied to investing.

In other words, and as I argue in Ichimoku Charts that Matter, shocks tend to happen in the direction of the trend. Rallies typically don’t end with a bang opposing extreme optimism like we see now, but rather, rallies tend to rollover, and the sharp downside moves that make headlines that turn into a bear market often come off a bad news crescendo when investors tend to sell first, and ask questions later.

Currently, we seem to be far away from a rollover as optimism reigns supreme. Also, aside from the 2001/2 recession, peaks in confidence tend to happen early- to mid-cycle favoring an extension of the current risky-asset buying environment.

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You Can’t Have Demand without Optimism, and Demand Is up per Oil Data

Two stories in the commodity world that have come to surface in recent months is the aggressive supply of crude oil from US shale producers that is running counter to the plans of OPEC and strategic alliance like Russia to reduce the supply glut.

Another focus has been on supply from China regarding steel and aluminum. The supply remained uncomfortably high for many despite the winter production curbs and enforced reduction and in some cases, halting of supply from ‘rogue’ metal suppliers. The trade tariff’s from US President Trump appear squared on China and Europe, and could cause the supply from China to not be adequately absorbed, and may put pressure on prices if optimism and demand do not stay supported.

However, in Crude’s case, at least when looking at IEA projections, demand is making the aggressive supply coming online be quickly absorbed. The monthly IEA report predicted a widening supply deficit forming later this year due to the decline in Venezuela’s Oil Production due to their own economic turmoil. The IEA forecast could mean that the global oil inventory surplus would disappear in H2 2018.

While demand is exciting in the short-term, supply is often stickier. Suppliers tend to look at their supply as prophetic, and a fall of demand is often seen, and hoped to be temporary. That is the pickle that global oil producers found themselves in during the 2013-2014 supply build up as demand fell-off and eventually sent Brent Oil to $30/bbl, before a sharp bounce took in early 2016.

Crude Oil And Crude Produce Stockpiles Continue To Fall On Higher Demand

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Data source: Department of Energy, Bloomberg

Next Arrow in the Bull’s Quiver, No Dollar Shortage in Sight

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Data Source: Bloomberg

Out of the gates of the Great Financial Crisis was a sharp inverse correlation between the US Dollar and riskier asset price levels. A large factor in this development was the view that there was a US Dollar shortage and demand for haven assets as investors remained unsure of the sustainability of the feeble recovery.

One of the metrics looked at in the financial market is sometimes referred to as the market’s plumbing or liquidity around the reserve currency, the US Dollar. The market that is utilized to see ‘funding stress’ or a ‘dollar shortage’ is the cross currency basis swap or when a currency from one investor is exchanged for another currency based on swap rates calculated from each country’s yield curve.

The chart above shows the rising LIBOR-OIS spread, which indicates a higher interbank borrowing cost over the implied Fed reference rate. While the spread is widening, stress that typically aligns with Dollar strength and a ‘dollar shortage,’ appears no where insight. The orange line shows the 3M EURUSD 3M cross currency basis swap with sharp downspikes showing funding stress. The lack of funding stress with the stable orange line means that traders looking for an aggressive dollar rally based on the shortage of USD argument could be waiting a while for their anticipated outcome to play out.

As a swap contract, there is no value on initiation, and the market value is based on demand for once currency or another. When looking at the EUR/USD or USD/JPY cross currency basis swap, you can see if a ‘dollar shortage’ is developing or whether they were plenty of dollar in the system such that the swap shows less of a demand for US Dollars.

Given the typical inverse correlation to the US Dollar and risky assets, a weaker dollar or lack of dollar supply like the chart above shows could mean that the risky asset rally has room to run as the other points make sense.

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—Written by Tyler Yell, CMT

Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.

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US Dollar on Offensive Before Fed Rate Decision. Will it Last?




US Dollar on Offensive Before Fed Rate Decision. Will it Last?

Fundamental Forecast for the US Dollar: BULLISH

  • US Dollar fell on in-line CPI data, then rallied into Fed meeting
  • Pre-emptive gains hint markets worried tightening will accelerate
  • Policy bets tellingly dwarfing news-flow from Washington DC

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A week marked by seesaw price action ended with a spirited push higher for the US Dollar. The rally was especially notable in that it occurred without an obvious fundamental catalyst. The week’s top data point of interest was February’s CPI print. The headline inflation rate printed exactly in line with forecasts at 2.2 percent, which eased worries about Fed rate hike acceleration and sent the greenback lower. A weekly bottom started taking shape a mere five hours later however, from which it rallied into Friday’s close.

The recovery tracked a parallel rise in front-end US Treasury bond yields. That this occurred after the influence of the CPI release subsided appears telling. The next bit of noteworthy event risk would not come until the FOMC monetary policy announcement on March 21. After newly minted Fed Chair Jerome Powell led a hawkish pivot in officials’ rhetoric in recent weeks, it seems entirely reasonable to suspect that it may mark a pickup in the expected pace of stimulus withdrawal. The Dollar’s rise then look like pre-positioning.

The priced-in rate hike trajectory implied in Fed Funds futures for 2018 has stabilized around 75 basis points, matching the Fed’s own forecast. Investors’ view for 2019 remains modest however. One rate hike is expected and the odds of a second are seen as worse than even. Nothing is on the books for 2020. That leaves plenty of scope for the Federal Reserve to signal a more assertive disposition. The first post-announcement press conference with Chair Powell presents a further opportunity to reinforce the pivot.

The US currency’s preemptive rally telegraphs the markets’ concern with such an outcome. Momentum will probably slow ahead of the announcement, with traders unwilling to commit until after it hits the wires. When that happens, fireworks are likely. The Fed’s primacy in shaping trends coupled with a tame docket in the days thereafter also means follow-through faces few obstacles. Indeed, short work was made of Rex Tillerson’s actual ouster from the Trump administration and H.R. McMaster’s rumored one last week.


— Written by Ilya Spivak, Sr. Currency Strategist for

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GBP: From Famine to Feast




GBP: From Famine to Feast - BOE, Hard Data and Brexit

Talking Points:

  • UK data releases include, Inflation, jobs and wages
  • Bank of England MPC announcement
  • EU Council meeting on the EU/UK transition period.

Fundamental Forecast for GBP: Neutral

While we remain neutral on Sterling at this current point, GBP may be in for a rocky ride next week with market moving data points including inflation, jobs and wages as well as the latest monetary policy announcement from the Bank of England. And just to round the week off, the EU Council will meet on Thursday/Friday to discuss the latest EU/UK transition period documents with UK businesses waiting for the outcome.

The latest inflation and wages data may well see the gap between the two narrow further – inflation expected to slip lower/wages expected to tick higher – giving the UK consumer more money in their pocket. The recent negative real wage gap has weighed on the UK retailers in particular and any narrowing of the gap may bring welcome relief to the high street.

The Bank of England is expected to leave all monetary policy levers untouched on Thursday but any change in voting pattern on rate hikes, or hawkish commentary in the accompanying statement may cement a rate hike at the May meeting, boosting the British Pound.

The UK and the EU are targeting next week’s EU Council meeting to finalise a Brexit transition period, giving government and businesses the clarity the require to build for the future. While negotiations have taken a slight turn for the better of late, with both sides adopting a more conciliatory tone, there possibility of a last-minute hitch is still very real, an event that would hit both GBP and EUR lower.

GBPUSD Price Chart Three Hour Timeframe (February 27 – March 16, 2018)

GBP: From Famine to Feast - BOE, Hard Data and Brexit

— Written by Nick Cawley, Analyst.

You can contact the author via email at or via Twitter @nickcawley1.

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