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The exuberant mood to buy the US Dollar post-Easter just keeps on going, reflected by the topside resolution in the DXY, where a close above the 97.60-70 key daily resistance has finally transpired. If we can find acceptance above this level on a weekly close, it could send shockwaves across the market as it would have negative repercussions for emerging markets at a time when the global growth recovery is still quite fragile even if China has shown signs of life even if very domestically localized. The Japanese Yen, while unable to keep up the rapid pace of appreciation by the USD, is nonetheless one of the top performers too alongside the Sterling. The EUR remains on the backfoot, finally re-imploding in what should be interpreted as a resumption of its bearish trend, with the close sub 1.12 technically damaging. The Canadian Dollar, on an equally weighted scale, ended up mixed despite weakness was obviously manifested against the USD, GBP, JPY. The worst performer by a country mile though was the Australian Dollar, hammered by the major miss on Wednesday’s Australian CPI readings as players now anticipate rate cuts by the RBA in coming months.
The breakout in the DXY is very significant, especially as it occurs without the backing of US yields, just as the S&P 500 is flirting with its all-time high. What are these dynamics telling us? First off, a point must be reiterated, and that is, for the DXY to finally close above the hugely relevant 97.60, it sets into motion a macro technical play that may take us towards the 99.50/100.00 level. Secondly, the USD has strengthened its dominance as the best alteative in an otherwise all dovish CBs environment. There were 2 central banks the market was not yet fully convinced they would ultimately tighten their screws by flirting with the idea of lower rates. However, after the disappointing Aus CPI and Canada’s Central Bank monetary policy outcome, the RBA and the BOC now join the ECB, RBNZ, BOJ, Fed in their dovish bias, while the BOE remains stuck in a dead road until a Brexit resolution. What this means, is that, if the market has got to accumulate a currency among any other, amid an environment of 0 monetary policy divergence and slower growth prospects as the drop in the US30y bond yield towards 1.9% reflects, that currency has got to be the USD. Besides, with a stock market in the US in rude health and the economy growing relatively strong vs other G10 countries, the rationale for the United States to keep attracting capital inflows makes it a genuinely appealing choice. The fact that the Japanese Yen index is holding relatively steady at a time of resurgence in US stocks, it can be understood as a play towards poorer growth prospects in the RoW, while the currency also acts as a source of demand due to the depressed fundamentals elsewhere.
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EUR/USD: More Downside Opens Up
The impulsive selloff in the exchange rate appears to have further room to go even if in the very short term the price has made it to its next 100% projection target at 1.1155. Note, the fact that such target, where market makers tend to be actively stepping in, has been violated, it implies that the fast money may continue to be interested piling into momentum trades amid the exuberant USD dynamics. If further selling transpires, 1.1120 is the next projected target ahead of the daily ADR at 1.1113 and the round number of 1.11. The market cycle is aggressively bearish, and a development that should be interpreted as structurally EUR/USD negative is the speed and magnitude of the bearish moves.
GBP/USD: Yet To Reach Its 100% Proj Target
The breakout of the previous low at 1.2915 allows for a new bearish 100% proj target of 1.2870. The bullishness in the DXY is out of question, especially on the break above 97.60-70 as seen. Throw into the mix the low interest to hold the Sterling on the Brexit uncertainty, and the path of least resistance continues to be for a bearish bias in the next 24h in line with the general USD strength theme. A descending trendline now guides the trend lower as yet another visual cue to refer to.
USD/JPY: Fresh Bullish Cycle Develops
The pair finds itself in a new bullish cycle that should draw interest from buyers to re-group and join the bid on a retest of the area between 112.00-112.05 ahead of a retest of the former range midpoint circa 111.85, where the ADR limit intersects on Thursday. It’s worth noting, however, that the exchange rate lacks sufficient value to justify such hefty levels at the moment, with the drop in the S&P 500 and US yields in the last 24h a clear negative for the pair. Overall, technicals underpin the exchange rate, fueled by a rampant USD, but the intermarket flows coming from US equities and yields should prevent the rally from finding enough committed buyers.
AUD/USD: Macro Support Hit, Bearish Bias
As calls for the RBA to further ease policy in coming months mount, on the back of the Aus CPI miss, so does the pressure by sellers to break the 70c. I must say that while the bearish bias is clear and supported by the whole spectrum of intermarket flows (Yuan, DXY, yield spread), the overextended bearish bar implies that the ris for a correction into 7025-30 exist. I am expecting the 7050 to be the line in the sand before an eventual resumption of the downtrend, aiming for a test of 70c.