Forex Today - A market long USD's is vulnerable as data improves elsewhere

Market Analysis /
Greg McKenna / 16 Jul 2018

Welcome to my Forex Today column where I'll give a brief wrap on the key drivers of Forex markets and throw in a chart of the day. 

As ever, feedback welcome. 

Forex markets are getting a little tetchy. EM currenices are still under pressure and the US dollar is making strides in this region. USDCNY is near 6.70, the USDMYR rate is at 4.05, USDKRW is at 1130 as trader fret about the outlook for these economies in a world where a trade war is looming large on the investment and economic horizon. 

In this environment, the USD looks set to benefit as an economy with genuine strength, a strong fiscal tailwind, and with a central bank still looking to get rates back toward neutral rates at least. 

But it's a more complicated environment against many of the majors where the US dollar's momentum has stalled. 

Before I get to that though, here's a quick summary of the action Friday. 

After President Trump's anti then pro Theresa May and a trade deal comments GBPUSD traded through a ~1.36 cent range over the twenty four hours of trade to end the week from 7am my time Friday. That bounce from 1.3102 to close around 1.3236 would normally put the bears to bed. But weekend comments from May saying it’s her way or “no Brexit at all” – that’s a ham-fisted way of saying HARD Brexit – and that the President had told her to “sue” the EU might reverse some of that reversal. It sounds desperate and HARD Brexit has to be a 40% chance.

Anyway GBPUSD is at 1.3226 this morning. It’s run down and up was reflected, to varying degrees, in other pairs against the USD. Initially stronger, the USD gave up the ghost and finished at 1.1688 in EURUSD terms, 94.67 in DXY terms, and 112.33 in USDJPY terms. Maybe the dip in Uni Michigan consumer confidence to 97.1 didn’t help the USD…but the data recently remains strong and the Atlanta Fed is projecting a 3.9% Q2 growth rate based on its GDPNow tracker.

Against the commodity bloc it was a similar story. The Aussie fell to 0.7367 but climbed back toward the 0.7425 region at the close. It’s opened a little weaker in early trade at 0.7409 though – sellers got to sell – but is back at 0.7413 now. The Kiwi also had a long tailed candle and is at 0.6758 while USDCAD is at 1.3157 after the rally in oil and the USD reversal helped the CAD.

To the data flow then and I reckon this is probably the most important chart and table in forex trading right now. I say that because what you see on the left is the rapid recovery in the various Citibank Economic Surprise Indexes for EU, GBP, JPY, CAD, and EM. Of course the bounce in Japanese data – relative to expectations – hasn’t helped the Yen at all over the past week it is the overall improvement in the past month in data flow from almost every region (except Australia which has been flat) which has helped turn sentiment back in favour of these currencies. Now as the CFTC data shows, see below, that has not changed the short positions in many pairs against the USD nor has it stopped the market getting long US dollar’s. And Euro data is still in negative territory. But what this turn in data flow has done is push back the tide of USD strength as relative performance in economies has shifted – or at least the perceptions have shifted a little.  

Click on me, I'll expand
Click on me, I'll expand

It remains my contention that the US economy and the Fed are still out in front and that this will impact the USD, driving it higher through time. But for the moment the improvement in data flow from the rest of the world has stalled that move – at least against the Majors. For the moment at least anyway.

No where is that more evident than against the Euro. It’s a confused and confusing picture. Over the weekend I shared two tweets from @MysteryTrader on the outlook for EURUSD which highlights how the stalled momentum and the range we seem to be mapping out in the 1.15-1.1850 region has confused the outlook. Where to next? Retail sales tonight in the US will be important. But so to will UK data, Brexit discussions, and Euro area inflation data this week. And it’s worth noting that Handlesblatt reported over the weekend that Bundebank President Jens Weidmann told the German cabinet growth is slowing.

Click on me, I'll expand
Click on me, I'll expand

And just briefly the CFTC data is interesting insofar as it continues to show the Market is now long USD’s. Sure the Euro is still net long, but it dipped a little. Elsewhere it’s a tail of short Aussie, CAD, Yen, Pound and so on. And of course check out the positioning in oil and US 10 years which had a mini-capitulation last week.  

Click on me, I'll expand
Click on me, I'll expand

DATA:

Nothing of note here in Australia. But the day ahead is going to be a big one of data here in Asia. We get the monthly triple treat of Chinese retail sales, urban investment, and industrial production data. But we also get Q2 GDP. Economists are forecasting GDP to print 6.7% yoy and are expecting a yoy growth of retail, investment, and production to 9%, 6%, and 6.5% respectively. That’s a big data dump and then tonight we get retail sales in the US for Jun which are expected to rise 0.5% the Reuters poll says.

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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