The dollar is at a tipping point

外汇

John Hardy

外汇策略主管

The US dollar rally has reached above major resistance levels against a few of the G10 smalls, and even toyed with the local downside pivot in EURUSD, but broadly speaking, the greenback is at a tipping point and the next few sessions – perhaps the weekly close, though more likely Monday’s close given the European Union event risks over the weekend – look critical for establishing whether this phase of consolidation will see greater ambition or find rejection from a fresh wave of selling.

While we have noted that weak risk appetite is one of the components likely required to sustain any further USD bid, the other component is likely a further rise in US yields and Fed rate hike anticipation, but that ingredient was missing in yesterday’s action as the rather ugly US equity session saw Treasuries supported all along the curve. 

The political dilemma for the UK could not be more fraught as the latest EU draft proposal ignores much of the UK’s assumed negotiating position, particularly the proposal that suggests Northern Ireland will have to remain in the customs union. There is the suggestion in a complete breakdown of talks, but what does that look like and what are the domestic ramifications? Why aren’t European private sector heads banging on their political leaders’ doors and demanding to know why the EU is treating its largest customer for exports like this?

This could get worse before it gets better and is particularly disappointing after a seeming ray of light from the EU parliament recently.

President Trump is making noise again on the threat of tariffs on steel and aluminium (from all countries, though clearly aimed at China, the world’s largest producer) and China has retaliated with its own threats but is also sending key figures to Washington for discussions. Any such move will also raise tensions with other trade partners. Ironically, the US imports far more steel from Canada than it does from China, and the tariff threats are likely a key component of USDCAD’s recent rise.

Looking ahead, it is world manufacturing PMI day, with many regions showing a deceleration in these diffusion surveys (where it is by definition impossible to continually improve at an ever-increasing rate). Yesterday’s big disappointment in the Chicago PMI points to the risk of a negative surprise for the ISM manufacturing, though it is the US January PCE inflation data that will occupy most of the market’s bandwidth today. A downside miss on the core PCE could inject the most volatility and clearly would be the most USD-negative outcome.

Chart: EURUSD

The action in EURUSD is teasing the range support since January, but the next layer of support is not that far below in the 1.2095 area. Clearly, this is a zone of decision for EURUSD and for the USD broadly speaking, where the stakes are high through the Monday close. This gives us a chance to have a look at this weekend’s event risks (Italian election and German SPD vote on the grand coalition agreement) and react to them.

EURUSD

The G-10 rundown

USD – some decent follow-through stronger versus risk-correlated currencies like the G10 smalls and EM, but as we suggest above, the greenback rally is not yet broadly decisive in broad terms.

EUR – a criticial test for the EURUSD supermajor over the next few session for technical and event risks reasons through this weekend’s EU political events.

JPY – the JPY received a boost from the Bank of Japan's buying shifts, and could see further upside on position unwinding, though the move looks broadly over-extended if risk appetite returns.

GBP – fresh Brexit woes, but are these enough to blast sterling through key support levels versus the euro that have been in place for months?

CHF – EURCHF surprisingly buoyant and suggesting that the market sees little to fear in this weekend’s EU political risks. USDCHF, much like EURUSD, is having a look at key USD resistance levels here.

AUD – AUDUSD breaking down through the important 0.7750-75 pivot zone, setting a bearish argument in motion that is valid as long as the break lasts – the key inconvenience being that this local break level sits right in the middle of the longer-term range.

CAD – Trump's trade tantrum keeping CAD under considerable pressure, with a steep selloff in crude oil yesterday after the US inventories adding insult to injury. USDCAD could eye the next resistance level ahead of 1.3000, but more would like require broader signs that this USD rally is set to extend.

NZD – the kiwi taking back most of the lost ground versus the Aussie as the 1.0850 resistance zone was never seriously challenged yesterday. The kiwi selloff may have been sparked by news of a near 8% drop in dairy production year-on-year in January.

SEK – weakness could prove overextended if risk appetite recuperates; SEKJPY a mean-reversion candidate for the knife-catching traders out there after falling almost 8% in the month of February.

NOK – falling asleep here, though a reasonable show of strength that NOK brushes off yesterday’s steep crude oil selloff.

Upcoming Economic Calendar Highlights (all times GMT)

   • 0800 – Norway Feb. Manufacturing PMI 
   • 0815 – 0900 – Eurozone Feb. Final Manufacuring PMI 
   • 0930 – UK Jan. Mortgage Approvals 
   • 0930 – UK Feb. Manufacturing PMI 
   • 1000 – Eurozone Jan. Unemployment Rate 
   • 1030 – ECB’s Nouy to Speak 
   • 1330 – US Jan. PCE Inflation 
   • 1330 – US Weekly Initial Jobless Claims 
   • 1500 – US Feb. ISM Manufacturing 
   • 1530 – US Weekly Natural Gas Inventories 
   • 1600 – US Fed’s Dudley (Voter) to speak 

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