Forex Today - The US dollar reversal has begun, but how far will it run?

Market Analysis /
Greg McKenna / 20 Aug 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....oh and for AUDUSD specifically you can find that in My Australia Today piece each morning on the blog. 

And, for a deeper dive into more currencies and the charts please see my daily markets video.

QUICK SUMMARY

On forex markets the USD reversal continued under the heavy weight of positioning and data flow. The DXY, which touched 97 last week ended Friday at 96.13. The Euro which bounced from around 1.13 intra week closed at 1.1437 while the pound climbed back to 1.2750. USDJPY is mixed however because of the USD swoon and sits at 110.49.

Of the commodity bloc as noted above the Aussie fairly roared with a 0.8% gain to close the week at 0.7316. It might be time for a run if the tensions between Beijing and Washington are seen to be lifting. Or at least if traders think that way. Of course this is against a backdrop of overall USD strength in the medium term. The Kiwi was almost equally as solid with a 0.76% rally to 0.6636 while USDCAD respected that downtrend line again and is at 1.3055.

BIGGER PICTURE

As I said in my Weekly Markets video yesterday, when is a good time for the USD to have a reversal of fortune? When positioning gets a little stretched and the buyers are a little tired. Based on the CFTC data released on Friday, as at last Tuesday, now might be that time. You can see the move in the individual net long position in the USD when I sum up the individual positions of the big specs (as measured by the CFTC) for Euro, Yen, GBP, CAD, AUD, CHF, Kiwi, and Aussie.  That’s the highest net USD long since early 2017 when the Greenback’s fortunes changed.

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

But If I extend that analysis in a different direction you can see that maybe the rate of change of positions over a 12 week period has been too fast and the USD buyers – sellers of everything else – need a breather.  What I have done in this next chart is simply calculate the 12 week change in net long USD positions through time. It’s something I’ve been thinking of for a while as a handbrake on moves – not just the USD – but it’s the first time I’ve put the chart together over the weekend. The result shows the move in the USD over recent times has seen the fastest position adjustment in the past 15 years (my positioning database length).

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

To give a proper measure this would need to be deflated by changes in open positions and total traded volume. I haven’t done that yet. And it is worth noting that positioning can stay extreme for a while. But what this look at positioning suggests is that we’ve swung to a very optimistic USD market right now. One which is vulnerable if Turkey settles down. But Equally one that is very vulnerable if the move toward trade talks takes the pressure off the Yuan.

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

As you can see in this chart of the daily moves in the EURUSD versus the USDCNY (inverted) there has been a strong directional relationship – USD of course  - between the two currencies over the past couple of years. To me China does not want USDCNY up through 7.0 anytime soon, they’re happier with it at 6.70 or 6.80. That wouln’t relieve the overall pressure on the Euro. But it would certainly abate in the near term.  

So the big question. How far will the bounce extend. My short term target for the Euro is 1.1560 based on the break of what looks like an inverted head and shoulder pattern on the 10 minute charts. And one of my favourite chartists – and close to the best – on Twitter, @HenrikZeberg has a similar target over the next few weeks.

Source: Twitter Screenshot
Source: Twitter Screenshot

You’ll notice he then believes Euro goes lower and the USD heads higher. I’m in that camp too. 

DATA:

It’s quiet on the data front today, indeed this week save for the minutes of the RBA, ECB, and FOMC meetings. The flash PMI’s later this week might be of interest as well. ON the day though it’s German PPI and a speech from Atlanta Fed President Bostic which are the highlights. We haven’t heard from the Fed in a while. That might be interesting.

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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