King Dollar rises again.
One thing Dollar bulls should remember is that they will forever and always have the worlds central banks in their corner with the Maestro himself, European Central Bank’s Mario Draghi atop his lofty rostrum orchestrating dovish Overtures. (more on this below)
On top of this weeks FOMC meeting, it’s a massive week on the economic calendar topped off with the always highly important NFP on Friday. Given that the Fed is still looking for signs of the illusive wage growth, AHE is the primary focus. However, I suspect there is a higher risk for the topside surprise which would add rocket fuel to the current USD rally. Whereas on a tepid wage print the USD adverse reaction would be muted due to ECB policy divergence and positive tax reform progress. From my perch, it’s s hard not to anticipate the market to own dollars into Friday’s NFP headline.
And, of course, let’s not forget the Fed nomination headlines.And while the intense market fascination still challenges my better judgment, we should expect some knee-jerk reaction to the announcement before the market quickly and correctly pivots to economic data and US tax reform
After last weeks punishing EUR sell-off, it will be interesting to see if the EURO Bulls can get up off the mat or remain down for the count. But given the latest turn of events, even most constructive and optimistic views would at minimum turn neutral suggesting the Hawks would put up only mild opposition to push lower
Indeed, the prospects of policy divergence between USD and EUR could warrant an extension of the dollar rally near term. And with a less cluttered path to US Tax Reform kicking the long dollar trade back to life, EUR is likely to remain under pressure near-term.
FX trading is a painful slog and rife with unpredictability. But one thing I’m very confident on is that Mario Draghi will wake up this morning with a massive grin on his face after announcing QE taper and having the Euro sell-off. Indeed the Grand Master of Central Bank Illusion was back at it again.
The Japanese Yen
USDJPY remains mired in a world of frustration for the dollar bulls. Incredible as it may seem with the USD ‘s stars aligning via robust US data, Tax Reform positivity, higher US yields and a surging Nikkei, USDJPY could only muster small gains into weeks end. As underwhelming as Friday’s close may seem, there’s more to it than just the obvious to remain constructive in this trade. In fact, buying the dips has stayed constant, so the shallower declines into the weekend suggest real dollar demand is brewing beyond fast money scalpers. But ultimately US yields and the global risk picture will remain the key external drivers of weak JPY. If we can push through the 114.50 level convincingly( July High) a test of 115.50 will be on the cards.
The BoJ will hold the policy meeting on Oct 30-31, where the Bank is broadly expected to leave its policy unchanged.
The Australian Dollar
AUDUSD remains under pressure, dovish RBA and some lousy noise on the political front, all scream sell the Aussie.But when factoring in the adjustment of CPI model to weigh negatively on the return to higher inflation forecast, the Aussie remains prone and extremely vulnerable to USD appreciation.
The New Zealand
Tuesday’s policy announcement’s by Prime Minister Ardern is the next market focus. The Kiwi sell off ran out of steam when .6820 ( May’s low) held.But given the sheer breadth of the current move, the pullback from the low on profit taking was not all that surprising.
But the with traders more focused selling the Aussie, the Kiwi could get a respite more in the absence of any political surprise on Tuesday. The next obstacles for the NZD will be Tuesday’s confidence data, which should sour given the recent political malaise and of course Wednesday’s all-important Employment data.
A quick review of Centeral Bank Policy makes an excellent argument for a stronger USD
The BoJ with the US’s unmentioned approval has overtly run a weak JPY policy forever.
The RBA has expressed no desire to raise domestic interest rates anytime soon as the stronger AUD weigh’s negatively on crucial exports
The BoC flew the hawks nest last week to roost with the doves after fearing the strengthening Canadain dollar could derail a fragile economic recovery.
The Pboc drew a line in the sand at 6.45-50 USDCNH in September by removing reserve requirement for foreign currency forwards making hedging dollars that much cheaper. All likely due to the fear that the yuan’s surge in value started to take a massive bite out of Chinese exporters profits.
Sure there’s a proper case for the BoE to move in November, but that will be more likely a one and done deal geared towards removing emergency accommodation. So its unlikely to result in a massive wave of Sterling purchases given that Brexit headwinds blow massive.
But its the ECB taking centre stage in the game of currency checkers that will have the most influence on the USD near-term direction. The ECB is afraid if the EURO continues to rise then the Eurozone export motor will sputter and stall EU economic recovery. As long as this rings true, the ECB will be very reluctant to raise interest rates.