FUNDAMENTAL ANALYSIS
FX
nobody wants a strong currency. Perversely, nobody wants the Dollar to be too strong either (including president Trump), and so policy makers face a bit of a dilemma at the moment, given the cracks emerging in some corners of the global markets after only a modest move in the Dollar.
Chart 1 – Daily US Dollar chart with 21 day moving average
through May, price advanced steadily with only shallow corrections. Since the end of May, price is basically flat and price action is much more choppy. The recent highs in the last week or two were not confirmed by momentum (green histogram) and stochastics (lower panel) are beginning to roll over. This type of price action is indicative of a period of
consolidation opinion.
If we step back and look at the weekly chart, there is some resistance in the 95+ area that has so far held the recent advance. As we said above, we are not sure exactly what path any consolidation may take for the
ahead, in our
On this point, we expect the Fed to maintain the current trajectory of gradual rate rises (we’ll go with two more this year) and quantitative tightening, which increases from $30 billion per month in Q2 to $40 billion in Q3 and $50 billion in Q4. Every other central bank wants to be more dovish than the Fed, and
Dollar, if one were to occur, but our working roadmap is that this is just a consolidation in a larger uptrend. Perhaps a consolidation will be orderly and find support in the 92 area, before the Dollar bull market resumes. Of course, a lot will depend on what path the major central banks will take in the meantime.
When we look at positioning of the speculative crowd, we see that they have finally jumped on the bullish Dollar story. With markets seemingly trying to hurt the most people most of the time, will this recent surge into Dollars prove to be a tactical error, or is this just the start of a larger trend of Dollar buying? As we have noted, our roadmap for the Dollar is consolidation followed by further advance, so for long term players, we think it’s buy the dip for now.
Chart 2 – Weekly US Dollar index with 21 week moving average
In terms of crowded trades, despite US yields moving lower and signs of global wobbles, speculative accounts have barely reduced their record short position in the 5 and 10 year part of the curve. So, as we sit here thinking about what would cause the Dollar to soften a little in the short term, we don’t think it will be global central banks suddenly becoming more hawkish than the Fed. It is more likely that either the Fed backtracks a bit, Trump verbally intervenes or economic data soften a bit. If any of these things happen, we think that US yields could move a bit lower as speculative accounts
FX TRADER MAGAZINE July - September 2018 23
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