Originally published by AxiTrader
QUICK SUMMARY
The pressure on emerging market (EM) forex was released a little overnight. The Argentine peso and Turkish lira both gained around 1.25% against the US dollar, while the Brazil real and Mexican peso were both around 0.3-0.4% better against the Greenback overnight. But Asia’s currencies were under pressure again yesterday and any hiatus in the forex universe is just a little calm in an enduring storm.
Looking at majors now, the Brexit news, along with Italian deputy PM Salvini’s promise to play nice on the deficit, and the Italian Government’s announcement of a debt buyback all combined to give the pound and euro a lift and knock the US dollar off its perch. GBP/USD and EUR/USD are both up o.45% at 1.2909 and 1.1631 respectively. USD/JPY sits around 111.53 for a gain of 0.1%.
On the commodity bloc the US dollar weakness and a little rally in copper seems to have helped the Aussie which sits at 0.7193, up 0.22%. The kiwi did better though with a 0.6% gain to 0.6592 while the Canadian dollar lagged with a gain of just 0.1% with USD/CAD at 1.3172 as the BoC left rates on hold, NAFTA is still unresolved, and oil prices fell.
BIGGER PICTURE
The US dollar is under a little pressure toda as EM currencies appear to stabilise and as headline risk in the pound and euro drives the dollar lower. The question today is whether this is a correction we can trade or whether this is just the calm in the storm. My sense is that if Deutsche Bank (DE:DBKGn) and Morgan Stanley (NYSE:MS) are right about positions in EM not really being adjusted yet (please see "Markets Morning" for more) then we are not far off the type of selling in EM markets which will really drive markets into a funk.
But that still doesn’t answer my question of whether this is a tradeable move, does it?
My sense is that the markets, forex in particular, are very data, event, and headline driven. So, given there wasn’t a lot of US dollar positive news last night it makes sense that the US dollar came under a little pressure. But what about tonight and the release of services ISM and associated data? What about tomorrow night and the release of non-farm payrolls.
Where is the path of least resistance?
Right here and right now for the US dollar it is probably lower in the short term. There is much positioning skewed toward a higher US dollar. There is much expectation of a move lower in the euro, the pound, the Aussie and many other currencies. So any misses on the data could provide that trigger for a short-term reversal in a way that the stronger data may not. It’s a question of a traders time frame and their approach I guess.
Taking a step back, or getting in the helicopter, my sense is that there is still move US dollar strength to come. But I note that the euro and the pound are hanging in there above the recent lows in a way the currencies of EM and those used as risk proxies are not. So we are getting a divergence of potential outcomes. EM as the main game due to trade and their own problems. Aussie and others as a derivative of the EM crisis and US dollar strength, and then euro and the pound as the result of US dollar moves, strength/weakness, the economy, and the Fed. Easy right?
That's pretty bullish EUR/USD candle there off the previous day's low. Lets see if 1.1650/55 can be broken, if it can euro can have a decent run.
I'll discuss all the majors I follow in my video which will be out a little later this morning.
DATA:
On the day today we get Australian trade data for July, South Korean current account, and German factory orders before the release of the Challenger and ADP precursors to tomorrow night’s non-farms. We also non-farm productivity, the Markit and ISM services PMI’s and factory orders. Not to mention the EIA crude data.
Have a great day's trading.