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Trade Wars Feed My Greatest Long-Term Concern for the Dollar

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Talking Points:

  • The US Dollar is the most heavily used currency in the world by a very wide margin, but this position isn’t permanent
  • Trade wars provoked and escalated by the United States could readily alter the flow of capital away from the US system
  • Given the aggressive US actions against its peers and a collective response, the Dollar risks a systemic reduction in its use

See how retail traders are positioning in EUR/USD and other key Dollar pairs. Retail traders are much shorter-term focused in their positions, giving important contrast to long-term risks. See the evolution of positioning using the DailyFX speculative positioning data on the sentiment page.

The US Dollar Isn’t Infallible, but It Is Robust

There is little doubt that the US Dollar is robust. The currency has grown to be an undisputed benchmark of the currency world and is anchor for the global financial system in its own right. There are a number of factors supporting this elevated status including economic girth, global integration and even habit. On the economic side, the United States represents the largest economy in the world by a large margin. This factor’s influence is rather straight forward in that its scale can prove a significant boon or subsequent burden to trade partners through its remarkable consumption of exports. However, there is also a financial side to that aspect as economic depth creates a more robust buffer to market disruption. That characteristic is best observed during periods of intense risk aversion where global investors flee to US Treasuries and Money Market assets. For global integration, the use of the Greenback as a base currency in exchanges or direct purchase of commodities is without equal. That in turn leads central banks to expand its reserves of the USD. Even the habits of global investors contribute to reinforce the currency’s status. As fear rises across the globe, capital flees to the safety of the US markets as it has in the past ostensibly for liquidity.

Trade Wars Feed My Greatest Long-Term Concern for the Dollar

Trade Wars Represent a Systemic Risk for the Dollar

There are many things that could theoretically challenge the position and use of the US currency in the global system. A global war that arises from a diplomatic blunder, an internal political crisis that sends capital rushing for the exits or debt crisis emerging from unchecked liabilities are all technically possible but improbable. Previously, I would have considered the United States withdrawing from its position at the center of global trade and commerce equally as unlikely, but that has clearly changed over the past months. The pursuit of tariffs against China represents a considerable risk for the US as the second largest economy and largest foreign holder of Treasuries can exert considerable influence. However, far more troubling is the country’s pressure on close allies. Following through on the steel and aluminum tariffs against the European Union, Canada and Mexico represents a remarkably belligerent stance on trade relations. What is strategically problematic for the US with this push is the likelihood that a greater segment of the world market will work together to circumvent and perhaps even penalize the instigator for this unwanted pressure.

Trade Wars Feed My Greatest Long-Term Concern for the Dollar

What Does a Loss of Reserve Status Mean?

Whether the intention is to simply compensate for the economic damage done to their country or to retaliate, the net effect will of a response by the United States peers and competitors will be a reduction in the purchase of Dollars. That is natural byproduct of a reduction in consumption of US goods that require the local currency. Yet, a more troubling side effect will be the establishment of direct connections to other global economies that can provide necessary substitutes and are seen as easier and more stable to deal with. China is already a great example of this opportunism as it continues to expand connection to global economies as it diversifies away from the US. As these various connections are made through natural trade of goods and services, financing and investment naturally follows. That changes the mix of needs for currency reserves and in any combination is a diversification away from the US Dollar. It is unlikely that the Greenback will relinquish its top status as it has considerable premium to burn, the government could steer out of its policies should they deliver too much pain and the agenda will naturally shift through political cycles. However, losing ground on this front carries serious ramifications for a currency too often considered incontrovertible.

Trade Wars Feed My Greatest Long-Term Concern for the Dollar



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Forex

Bitcoin Net-Longs Slide Into 1-Month Lows

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Bitcoin Client Positioning

Bitcoin Net-Shorts 5.2% Higher Since Last Week

Bitcoin: Retail trader data shows 76.8% of traders are net-long with the ratio of traders long to short at 3.3 to 1. The number of traders net-long is 1.1% lower than yesterday and 8.0% lower from last week, while the number of traders net-short is 0.5% lower than yesterday and 5.2% higher from last week.

Be sure to check out our Bitcoin Trading Guide if you’re new to cryptocurrencies!

Bitcoin Net-Long Dip Indicate Bullish Bias

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Bitcoin prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current Bitcoin price trend may soon reverse higher despite the fact traders remain net-long.

— Written by Yayati Tanwar, DailyFX Research



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Canadian Dollar (CAD) Eyes Latest Inflation Report

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Canadian Dollar Price, News and Analysis

  • Inflation expected unchanged, but any uptick could seal another rate hike in October.
  • Canadian economy continues to grow strongly.

IG Client Sentimentshows retail are 46.3% net-long of USDCADa bullish contrarian sentiment indicator.

Canadian Dollar May Receive a Boost on Latest Inflation Report

The Canadian dollar is currently treading water ahead of the July CPI report with the market expecting a 0.1% month-on-month rise and a 2.5% annualized reading, both unchanged from last month’s strong report. Canadian CPI grew at its fastest rate in over six years in June, due to higher energy prices, and another strong reading today will increase pressure on the Bank of Canada to hike rates again, probably at the October meeting. The central bank has already hiked rates by 0.25% twice this year and by a total of four times in the last 12 months. Last week data showed Canadian unemployment falling to 5.8% from a prior 6% while employment grew by 54.1k against expectations of 17K and a prior month’s 31.8k.

USDCAD has remained in a 1.2950 – 1.3200 range over the last month, despite the strength of the US dollar and fears over the NAFTA negotiations. The pair currently trade at 1.3130, just above 23.6% Fibonacci support at 1.3118 and below the July 24 high at 1.3192. An inline or slightly stronger-than-expected reading would seal another 0.25% rate hike and see USDCAD break lower with the 38.2% Fibonacci retracement at 1.2952 the short-term target. A weaker-than-expected reading today would see the July 24 high under pressure.

We have recently released our Q3 Trading Forecasts for a wide range of Currencies and Commodities, including the Canadian Dollar.

USDCAD Daily Price Chart (January – August 17, 2018)

Canadian Dollar (CAD) Eyes Latest Inflation Report

DailyFX has a vast amount of updated resources to help traders make more informed decisions. These include a fully updated Economic Calendar, and a raft of Educational and Trading Guides

— Written by Nick Cawley, Analyst

To contact Nick, email him at nicholas.cawley@ig.com

Follow Nick on Twitter @nickcawley1



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USD/CNH & Gold Price Action Point to Reversals Gaining Traction

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Gold, USD/CNH Technical Highlights

  • Gold price reversal and sentiment supportive of a low
  • Correlation between Gold & CNH extremely high
  • USD/CNH reversing hard from near Dec ’16 peak

For an in-depth intermediate-term technical and fundamental outlook, check out the Q3 Gold Forecast.

Gold price reversal and sentiment supportive of a low

On Wednesday, we were discussing the oversold, overly bearish backdrop in gold, but that first we needed to see some type of swift flush and reverse or something of that nature before looking for a low. We didn’t have to wait long, as the past few sessions qualified as flush-and-reverse price behavior, with silver, unsurprisingly and in silver-like fashion, displaying even more capitulation-like behavior, shedding 3 of its 4% in an hour on Wednesday.

As long as gold & silver can hold onto yesterday’s lows on a closing basis, we’re looking for at least a rebound back to the point of origination of the most recent leg lower (~1210 & 15.30). If another leg lower develops we’ll have to reassess.

Check out the IG Client Sentiment to see how other traders are positioned and why it can be used as a contrarian indicator.

Gold Daily Chart (Flush & Reverse)

Gold daily chart, flush and reverse

Correlation between Gold & CNH extremely high

If gold is reversing then so is CNH and vice versa. Gold and CNH have a 3-month correlation of 97%. They are effectively the same market at this juncture. How one plays it is up to the instrument of choice, but be mindful of total risk if trading both.

Gold/CNH Daily Chart (97% 3-mo Correlation)

Gold/CNH daily chart (97% 3-mo correlation)

USD/CNH reversing hard from near Dec ’16 peak

USD/CNH is in the process of carving out a weekly key-reversal bar just shy of the December 2016 high, assuming it doesn’t post a big rally from here. Trade a little higher today or lower and the reversal currently in place will stand as confirmed.

The candle development along with a break in the upward channel on the daily time-frame should usher in more selling, and perhaps in swift fashion. Looking lower, there are minor levels along the way that were carved out as the channel matured, but the broader target is the bottom of the upward grind since last month, right around the 6.60 mark.

USD/CNH Weekly Chart (Key-reversal nearly complete)

USD/CNH weekly chart, key-reversal as long as no sizable rally ensues today

USD/CNH Daily Chart (Channel break to send it lower)

USD/CNH daily chart, channel break to send price lower

Resources for Forex & CFD Traders

Whether you are a new or experienced trader, we have several resources available to help you; indicator for tracking trader sentiment, quarterly trading forecasts, analytical and educational webinars held daily, trading guides to help you improve trading performance, and one specifically for those who are new to forex.

—Written by Paul Robinson, Market Analyst

You can follow Paul on Twitter at @PaulRobinsonFX



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