Originally published by AxiTrader
Welcome to the Forex Today column.
In it, I'll be trying to add a bit more colour and a lot more charts than I do in my broader overnight Market Wrap I do first thing every morning to set myself and my trading up for each day and each week.
RECAP
The divergence between the performance of the euro and pound with much of the rest of the forex universe's performance against the US dollar continued overnight.
Both EUR/USD and GBP/USD made new highs for the current run while the yen, Swiss franc, Australian dollar, kiwi, and Canadian dollar remained under a little pressure. Likewise, the Singapore dollar is showing signs of turning as well.
It doesn't mean that the US dollar is about to have a strong surge necessarily. But what it does suggest is that traders are becoming more discerning as many pairs hit multi-year highs.
Perhaps with a little time to reflect on the wash-up of the four Fed speakers we heard from last night traders may indeed rethink their recent US dollar bearishness. Because the washup is the Fed looks set to stay the course.
HERE'S A DEEPER DIVE - IN A LITTLE MORE DETAIL AND WITH A FEW CHARTS
The US dollar made a fresh low in US Dollar Index terms and against the euro for this run overnight printing 92.40 and around 1.1909 in overnight trade. It’s recovered a little from these lows but is still down on the day against the euro (1.1852) and pound (1.3222). The key here seems to be about central bank moves and what and when they might adjust rates.
But it seems to me traders are stuck in the rut of ignoring the Fed and what it says and focusing on what they think the ECB or BoE - previously BoC - will do to the exclusion of a sense of reality or relativity.
Take the words we heard from Fed speakers Mester, Williams, Bullard, and Rosengren overnight. I covered it extensively in my overnight market wrap - but the key take away is that the consensus is for more tightening by the Fed and the start of balance sheet reduction is not far away.
Rosengren, in particular, pointed out the tightness in the labour market and the chance that unemployment could fall under 4% in the next couple of years.
Even the flat Phillip's Curve we seem to have in the US these days suggests wages and price pressure will emerge under that scenario.
So the Fed is likely to stay the course.
While in Europe inflation is lagging with the pace of producer price growth slowing sharply in recent months (see also the overnight wrap).
So while I know no one wants to hear my bleatings on this at the moment my sense is at some point the US dollar is going to have one heck of a bounce.
Tonight the BoE meets and even though no-one really expects a move the MPC is likely to again record a split decision signalling the move to tightening is still on track. I'm not sure the BoE will be as hawkish as expected.
It would be a big deal for the chief economist to vote against his boss - Mark Carney - so we'll probably end up at 6-2. Which then means the ball is in Carney's court (along with the inflation print) as to the outlook. My sense is he'll still be cautious.
We'll see.
Looking at the price action you can see that my rhetorical debate above holds no truck with traders. The saw tooth pattern of the GBP rally hasn't reasserted itself yet and prices are still pushing higher. I'm waiting though.
Looking at the euro it's clear that forex traders continue to believe the uptick in growth across the EU will pressure the ECB to abandon emergency measures. Hence the enduring run higher.
I have great sympathy for this view. But the ECB is a single factor central bank with an inflation mandate. What to make then in the 0.1% fall in PPI during June and the deceleration in yoy growth from 3.4% to 2.5%?
Again that's rhetorical for the moment. EUR/USD has still yet to make a clear high or generate a signal to sell. The price action reminds me of the kiwi which took some time to top.
So we wait, and the rally continues.
Looking at the Swissie we see that it is lower against the US dollar and the euro this morning. USD/CHF is up at 0.9703 for a gain of around half a percent. That’s driven EUR/CHF above 1.15 – oh how the SNB must be cheering.
The Japanese yen is also a little lower. Comments from the BoJ on the open ended nature of the inflation target suggest enduring monetary accommodation and that’s important for forex markets right now. At 110.70 this morning USD/JPY is mid-range, but higher, over the past 24 hours.
Looking at the commodity bloc USD/CAD is a little higher at 1.2570, the kiwi remains under a little pressure after yesterday’s miss on employment at 0.7429 this morning while the Aussie dollar has fought back hard from a low around 0.7942 and is trading at 0.7962 this morning. That the Aussie buyers prevailed above Friday night’s low around 0.7936 is important. Today’s trade data will be a key driver in our time zone today.
I've written my usual Australian dollar column here.
And here is the chart of the USD/CAD - its hit the fast moving average but looks like it is on the way higher. Target 1.2680 then 1.2930/40.
Have a great day's trading.
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