Fundamental Forecast for USD: Neutral
If you’re looking for longer-term analysis on the US Dollar, click here for our Trading Forecasts.
The US Dollar is looking to cap-off a second week of indecisive price action: After last week saw a Doji print around the 90.00 level on DXY, this week’s bar is currently showing a spinning top formation around the same price. Despite this back-and-forth, it was actually a rather interesting week of short-term movement in the Greenback. As we opened on Sunday, USD weakness continued to show, extending the declines that had started on the prior Thursday around ‘Tariff talk’. That weakness ran into the early-US session on Tuesday morning, at which point a bit of support began to show around 89.40. Prices ran up to test the 90.00 level, but as we’ve seen in multiple instances over the past six weeks, bullish motivation started to wane on tests above that level and prices pulled back after the Non-Farm Payrolls report.
US Dollar Price Chart: Four-Hour Time-Frame, Back to 90.00 as Range Expands
Chart prepared by James Stanley
The big USD-driver for this week was Non-Farm Payrolls, released on Friday to a strong print of +313k versus an expectation of +205k. Normally, a beat of this nature would really grab attention from Dollar bulls attempting to get in-front of higher probabilities for rate hikes in the near-future. And to be sure, we did see those nearby rate expectations firm, as probabilities for a hike at the Fed’s March meeting have moved up to 88.8% via CME Fedwatch. But what didn’t’ come along with that move was the US Dollar, as traders merely used this morning’s bump-higher to sell DXY right back down to 90.00. A logical explanation for this weakness was the lagging Average Hourly Earnings in this morning’s report, coming in at 2.6% v/s a 2.8% expectation; which runs in stark contrast to last month’s surprising 2.9% number that was revised-down to 2.8% this morning. But – US Dollar weakness has been a fairly pervasive theme for over a year now, so there’s likely another explanation of what’s helping to keep the US Dollar so weak on a longer-term, bigger-picture basis.
US Dollar Price Chart via ‘DXY’: Down as Much as 15% From 2017 High to 2018 Low
Chart prepared by James Stanley
At this point, markets are pricing in a 34.2% chance of a full four rate hikes out of the Fed this year, with a 73.3% chance of three hikes in 2018. This runs in stark contrast to other Central Banks around the world, with both the European Central Bank and the Bank of Japan both avoiding the topic of rate hikes altogether at this week’s rate decisions, continuing with their current full-throttle QE outlays.
Longer-Term USD Weakness
Spot FX markets are forward-looking, just like bond markets or equity markets. Market participants aren’t usually going to wait around for a rate hike to begin pricing that in because, frankly, it could already be too late to actually trade the move by the time the hike is announced. So, the fact that we’ve seen a US Dollar that’s lost as much as 15% from last year’s high continuing to sell-off, even as the Fed is one of the only games in town on the rate hike front, and this would point to the fact that something else is going on here as market participants are and have been adjusting to the current backdrop.
Last week we looked at a possible explanation for this when we discussed US fiscal policy. The US government is expanding at a fast pace, with $500 Billion in extra spending over the next couple of years along with an extra $1 Trillion in tax cuts over the next ten. The US government runs at a deficit; so to fund these initiatives the Treasury department is going to need to raise funds through debt auctions. These debt auctions will increase the supply of Treasuries, which will pull prices-lower, all factors held equal (supply/demand equilibrium). The lower prices on Treasuries to take into account the new additional supply would also bring along higher yields, much as we’ve seen so far throughout 2018.
Paul Tudor Jones, the legendary and famed trader and Hedge Fund manager made a comment earlier in February in which he said: “If I had a choice between holding a US Treasury bond or a hot burning coal in my hand, I would choose the coal.” This will likely remain as a pertinent theme across global markets in the near-term, and this will probably continue to impact the US Dollar as demand for US Treasuries and, in-turn, demand for the US Dollar lags as driven by US fiscal policy; even in the face of tighter monetary conditions.
US Treasury Yield on 10-Year Notes: Monthly Chart, Fast Approaching Seven-Year High 3.04%
Chart prepared by James Stanley
This is relevant because it’s likely a key factor behind the US Dollar’s pervasive weakness, even as the Fed is one of the few developed Central Banks actively tightening rates. This is also something that could keep pressure on the Greenback, particularly as there are other Central Banks still actively supporting their respective bond markets via QE programs in both Europe and Japan. If you’re at a hedge fund or if you’re trading bonds, why take the risks of standing on a slippery slope in US Treasuries when much more optimal conditions are available overseas; at least for now? This also helps to explain why the Euro has been so strong over the past year despite the fact that Yields across the continent remain at extremely low levels.
Next Week’s Calendar: High-Impact US Data on Tuesday, Wednesday and Friday
The big item out of the US next week are February inflation figures, set to be released on Tuesday morning. The expectation is for 2.2% annualized on the headline number to go along with 1.8% for Core inflation. Retail sales figures are released the following morning, currently carrying an expectation for a .4% print; and the week closes with U of M Consumer Sentiment. These can each bring some baring on near-term price action, particularly the inflation report as the week after brings the March FOMC rate decision.
DailyFX Economic Calendar: High-Impact US Items for Week of March 12, 2018
Chart prepared by James Stanley
Next Week’s Forecast
The fundamental forecast for next week in the US Dollar will be set to neutral. While the longer-term bearish trend remains, along with the possibility for more, the flares of strength that have shown over the past two weeks should not be ignored. Next week brings inflation figures, and the week after that brings the March FOMC rate decision with that widely-expected rate hike. That rate decision will be new Fed Chair Jerome Powell’s first at the bank, so this would be a good time to get a read on the new head of the Fed. This could also be an environment ripe for a squeeze for USD-shorts, and this may be an opportune time to wait for rips in order to sell at higher prices.
To read more:
Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q1 have a section for each major currency, and we also offer a plethora of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.
— Written by James Stanley, Strategist for DailyFX.com
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EURUSD Elliott Wave from February 2018 Concludes
EURUSD Elliott Wave at high probability the bottom is in
We began building our short EURUSD position in two separate occasions from April 10 at 1.2350 and April 26 at 1.2153 in anticipation of a developing bearish impulse wave. Though our first target of 1.1554 was hit on May 29, the bearish impulse wave appeared incomplete. As of May 29, we could count three of the five Elliott Wave impulse waves lower, which implied a fourth wave correction and fifth wave sell off still to come.
On August 6, we closed down half of the position (booking +791 pips) and tightened the stop loss on the remaining short EURUSD to 1.1750. We are now going to tighten the stop loss further as evidence is growing the bearish impulse wave from February 2018 has ended or is about to end with one more dip. Therefore, we are moving the stop loss on the remaining short EURUSD position to the August 6 low of 1.1530.
If EURUSD pops above 1.1530, then we will gladly book the remaining profits and head to the sidelines as EURUSD may be in the beginning stages of a multi-month rally that may drive to 1.17-1.22.
Elliott Wave Theory FAQ
What Elliott Wave is EURUSD in right now?
Our analysis points to a bearish impulse wave ending from February 2018 to August 15, 2018. This bearish impulse wave is likely wave 1 of a larger bearish impulse wave or wave A of a larger zigzag wave.
Our beginner and advanced Elliott Wave guides share with you typical waveforms and structure that include tips on how to trade with the waves.
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—Written by Jeremy Wagner, CEWA-M
Jeremy Wagner is a Certified Elliott Wave Analyst with a Master’s designation. Jeremy provides Elliott Wave analysis on key markets as well as Elliott Wave educational resources. Read more of Jeremy’s Elliott Wave reports via his bio page.
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Australian Dollar May Get Some Respite If Only For Lack Of News
Fundamental Australian Dollar Forecast: Neutral
AUD Talking Points
- The Australian Dollar remains in a pervasive downtrend against its US cousin
- Interest rate differentials and twitchy risk appetite will probably ensure it stays ther
- But this week could offer some pause
Find out what retail foreign exchange traders make of the Australian Dollar’s prospects right now, in real time, at the DailyFX Sentiment Page
The Australian Dollar faces multiple sources of downward pressure but the coming week’s light economic data schedule may offer it some probably temporary reprieve.
The widening interest rate differential in favor of the US Dollar does not appear to be going anywhere soon. Reserve Bank of Australia Governor Phillip Lowe testified before Parliament last week that, although the RBA still thinks the next move, when it comes, will be a rise, there’s no near-term case for any such move.
Indeed local futures markets do not now price in any change to the record-low, 1.50% Official Cash Rate until at least the start of 2020.
But the Aussie’s worries go a little deeper than simple rate comparisons. Risk aversion sparked first by global trade worries and then by thy collapse of the Turkish Lira has also weighed on the growth-linked currency. Morever, signs that the best of China’s growth for the year may now be behind us have also done it no favours. Official industrial production and capital investment data out of China missed forecasts significantly last week. They were also the first look at figures for July, and suggested that 2018’s second half may well be tougher than its first, with or without a trade settlement between Washington and Beijing.
So, given all of the above the Australian Dollar backdrop looks just about as gloomy as ever, especially as the markets also suspect that the RBA doesn’t mind its weakness at all given how often it talks about a weaker currency making growth and inflation goals easier to hit.
But the week doesn’t offer much in the way of Australian economic numbers. We will get the minutes of the last RBA monetary policy meeting. However, seeing as investors heard from the governor himself only a few days ago, scope for big moves on the minutes would seem very limited.
Make no mistake, the Australian Dollar is still biased lower against its US big brother, but it has been hit fairly hard in the last couple of weeks. The coming sessions could offer some breathing space and consolidation so it’s a neutral call.
Resources for Traders
Whether you’re new to trading or an old hand DailyFX has plenty of resources to help you. There’s our trading sentiment indicator which shows you live how IG clients are positioned right now. We also hold educational and analytical webinars and offer trading guides, with one specifically aimed at those new to foreign exchange markets. There’s also a Bitcoin guide. Be sure to make the most of them all. They were written by our seasoned trading experts and they’re all free.
— Written by David Cottle, DailyFX Research
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Chinese Yuan, Hong Kong Dollar Eye on Central Banks’ Defense At Key Levels
FUNDAMENTAL FORECAST FOR CNH: Neutral
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- PBOC stepped in twice when the USD/CNH broke above 6.90, a key threshold below 7.0.
- US-China Trade war and weak Chinese fundamentals add difficulties to support the Yuan.
- USD/HKD touched the lower limit of 7.85, a level that HKMA will continue to defend.
The offshore Chinese Yuan gained against the U.S. Dollar this week after nine consecutive losses, amid the PBOC’s further intervention to defend the Yuan. Overall, the Chinese currency rose against seven of the G10 currencies, except the CAD, JPY and NZD. The Hong Kong Dollar, used in one of China’s autonomous territories, touched the lower band of its pegged currency regime and triggered local monetary authority’s intervention. Looking forward, both currencies will continue to eye on policymakers for support, amid both internal and external pressure.
PBOC Watches USD/CNH’s Key Levels of 6.9 & 7.0
China’s Central Bank shut down channels for commercial banks to deposit or lend the Yuan to the offshore market through the free trade zone scheme, after the USD/CNH jumped above 6.90 on Wednesday. This basically tightened the offshore Yuan liquidity and increased the cost of Yuan short. Following the move, the USD/CNH fell back below 6.90.
Two weeks, the PBOC hiked the reserve requirement ratio on FX forwards last week, after the USD/CNH hit above 6.90 for the first time in 15 months. Breaking above this level could spark further selling sentiment, as it approaches the record low level of 6.9865 for the Yuan. In addition, it leaves little buffer area before the rate can touch the critical psychological level of 7.0. The last time the Yuan at 7.0 was more than 10 years ago, even before the offshore Yuan exchange rate regime was introduced.
The PBOC has clearly stated in the Q2 report that it will counter against the excessive selling in the Yuan driven by sentiment. Coupled with resumed plunges in Chinese equities seen this week (Shanghai Composite Index dipped to 17-month low), calming markets will be one of the policymaker’s top priorities next week. Besides the above two uncommon measures, the regulator issues the daily reference rate, which has been held below 6.90 as well.
Challenges to Defend the Yuan
Uncertainties around the US-China trade war remain. The two parties will resume negotiations in late August but both have become cautious, with only Vice Ministers attending the meetings; this is downgraded from Minister-level-and-above meetings seen in April and May, when the two sides failed to reach a consensus. At the same time, the tit-for-tat attacks are underway: US tariffs on $16 billion Chinese goods, the second batch of a total $50 billion, will enter effect on August 23; China’s retaliation on the same amount of US goods will follow immediately. The uneased tensions in trade could dampen market sentiment in the Yuan.
China’s fundamentals are less likely to help much either. The July Retail Sales and Industrial Production both dropped from the last month and below expectations, hinting weak consumption and production. In addition, Fixed Assets Investment, which is considered to expand at around the same rate of GDP, set a new record-low of 5.5% in July. Besides the domestic difficulties, the contagion of high volatility in emerging-market currencies seen recently has the Yuan at risk as well.
HKMA Eyes on USD/HKD’s Key Level of 7.85
The USD/HKD touched 7.85, the lower limit for the Hong Kong Dollar’s trading band under the current pegged exchange rate regime. In order to maintain the regime, Hong Kong Monetary Authority (HKMA), which serves as an independent central bank in Hong Kong Special Administrative Region, purchased a total of HK$16.8 billion during three consecutive days from August 14. This is equivalent to sell US$2.1 billion to the market.
The recent plunge in emerging market currencies was a trigger to the Hong Kong Dollar’s weakness this week. Yet, the main contributor was the widened interest rate spread between the HKD and USD. Since the U.S. Fed began to increase rate in late March, the pressure on the Hong Kong Dollar has become intensified.
On April 12, the USD/HKD hit 7.85 for the first time in 35 years. This triggered HKMA’s intervention for the first time since HKD’s trading band of 7.75 to 7.85 was set in 2005. Since then, the monetary authority has stepped in 18 times and purchased a total of HK$87.1 billion (US$11.1 billion) from the market. This cost about 2% of Hong Kong’s foreign reserves (US$424.3 billion, according to the July figure).
Next week, with the Jackson Hole meeting and FOMC minutes underway, the Hong Kong Dollar will likely continue to bear downward pressure, which means HKMA will need to continue to sell the USD and purchase the HKD to maintain the pegged exchange rate regime.
— Written by Renee Mu, Currency Analyst with DailyFX
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