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On USD’s Broad Tumble

By Ashraf Laidi  |  12/01/2018 17:17
”USD forex analysis
Many tend to exaggerate the term “perfect storm” when attempting to highlight several causes to an emerging event. The latest tumble in the US dollar can fairly be explained due to a set of reasons, all of which will help to enforce the secular downtrend of the US currency in the year ahead. More on these below.

The most striking aspect of today’s USD decline is its fall against the British pound to the lowest level since Brexit referendum of June 2016. Indeed, GBP is the day’s highest performing currency among G10 currencies, gaining over 1.1% vs USD to hit the highest since June 24, 2016.

1. After the USD rebounded on Wednesday from reports that China was reducing its purchases of US treasuries—a story that was later denied by Beijing—the greenback dropped back down on Thursday on a double negative from weaker than expected producer prices index and higher than expected rise in weekly jobless claims. The data will do little to alter expectations that the Fed will raise rates more than 2-3 occasions this year.

2. Flows shifted further away from USD upon the release of the minutes from last month’s ECB meeting indicating the more hawkish members may get their way and signal an earlier than-anticipated change in language on the economy, aimed at signalling more QE reduction.

3. Considering that EURUSD pair rate accounts for about 25% of the daily turnover in the spot currency market (another reason why EUR is known as the anti-USD, such a structural development in the pair generally helps guide the rest of the USD pairs.

4. Momentum in the above dynamics has been facilitated by the surge in German bond yields, which dragged down the yield spread on the US-German 10-year bonds to 3-month lows. I addressed the Treasuries-Bunds factor two days ago in this week’s video, as market chatter revolved around US bonds yields. Spreads and yields differentials matter more in FX than absolute yield levels.

5. Considerable EUR momentum emerged in early Friday morning As German Chancellor Angela Merkel’s Christian Democrats party reached a preliminary accord with the Social Democrats to end Germany’s 100-day political gridlock, and inching closer to a fourth term for Merkel. The euro move extended into an already weak USD foundation.

6. Aside from improving technicals, the pound’s advance were especially helped by a report that Spain and the Netherlands would be willing to reach a soft Brexit deal with the UK, thereby preserving close trade and investment ties with minimal detriment to the pound.

7. The USD selloff somewhat stabilized after today’s release of US December CPI beat 1.7% expectations at 1.8%, when excluding food and energy, but retail sales slowed by more than half to a weaker than expected 0.3% rise.

For those who give little importance to fundamental factors, FX and yields charts dynamics continue to weigh on the USD. In the case of GBPUSD, rising gilt yields combined with the fact that net GBP longs vs USD among speculative futures trades show none of the overbought dynamics shown by EUR net longs. This may well be the reason why algos are set on retesting $1.38.


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