The Narrative Around The US Dollar Has Changed And Its Breaking Higher

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.

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Part of the behavioural stuff I pay attention to is the narrative around market moves, around economic data, and within my own thoughts and writing it reflects these moves. It's not exactly an out of body experience but it certainly is me sitting on my own shoulder and watching the subtle shifts that could suggest a trend change, or a big move, is imminent.

As I highlighted yesterday, I sense a changed narrative around the US dollar and it's outlook. Certainly, the German election is part of that. But as I highlighted earlier this month the BAML survey of big - and influential - global investors had flagged the short US dollar trade as a crowded one. That in turn suggested to me these investors would be absent from any further selling - it spoke to changed thinking and a changed outlook for the US dollar.

So since the low in early September the US dollar has been trying to base. Messily for certain, but base building none-the-less.

Last night's comments by Fed chair Janet Yellen, when combined with the German election, and the real prospect of US tax cuts has reinforced the changed narrative. How far the dollar can run after such a big fall is difficult to know but a move of at least 2-3% from current levels seems fair and would satisfy a simple - garden variety - 38.2% Fibonacci retracement of US dollar weakness over multiple time frames.

Then it's up to the data and the Fed to determine if the worm is really turning for the US dollar.

HERE'S A DEEPER DIVE - IN A LITTLE MORE DETAIL AND WITH A FEW CHARTS

First to what Chair Yellen and President Trump said about rates and tax cuts overnight.

As I highlighted in my overnight Markets Wrap earlier this morning Yellen effectively said the Fed is going to keep raising rates because the risk of not doing so and then have to react with hard and fast rate rises which could threaten a recession was too great.

So we can use the Fed's dot-plot of one more hike this year and three next year as the base case not the best case the market had ascribed to that outlook last week.

That's important for interest rate differentials spreads, and thus important for exchange rates.

Likewise, President Trump gave the US dollar a bit of a lift last night promising a "tremendous" tax cut. There is some hope he'll but some meat on the bones of this policy at a speech tonight.

Again, tax cuts are viewed as stimulatory and positive for the US dollar.

So the US dollar took a lot of heart from both these and the struggles of the euro, and kiwi, after the elections on the weekend and it is trading above 93 in US Dollar Index terms.

That also means it's above the 92.65/70 level I highlighted yesterday as resistance - now support.

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So, as a result EUR/USD is down about half a percent at 1.1777 and on the way to my target – see below.

Euro broke through the 6-month downtrend yesterday and then took out 1.1820 overnight. Tick, TICK for further weakness.

But as momentous as that fact is it seems some traders are more interested in the potential bearish lead that the break of the neckline of an apparent head and shoulders pattern in EUR/USD suggests. That break suggests a fall equal to the size of the H&S pattern which is about 200 points. That targets a move to the low 1.1600 region.

That’s a little below my current target of 1.1660/80 that I’ve penciled in. But if that level breaks I’d see a deeper retracement – and thus satisfaction of the H&S pattern regardless.

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The pound is doing exceptionally all things considered. I guess it's because a lot of the euro’s weakness is about German politics the pound has been able to resist the US dollar and it is only down 0.1% at 1.3451.

It does look very toppy though on my charts and I was triggered short in the past 24 hours.

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USD/JPY found its mojo as traders again seem to relax about North Korea. That makes sense because even though it’s fair to say we all worry about the impact of war on the peninsula it is still – hopefully – a low probability event.

Certainly that is what the market is betting based on moves in USD/JPY which is up half a percent to 112.26 and USD/CHF which has risen 0.3% to 0.9690. Gold tells the same story, as does the little lift in US rates.

That said USD/JPY still looks slightly toppy. A new high would negate that outlook however.

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Looking at the commodity bloc and the Canadian dollar is outperforming the Aussie and kiwi as traders await a speech from BoC governor Poloz tonight and as oil prices remain elevated. USD/CAD found resistance right where it should have last night

USD/CAD found resistance right where it should have last night in the 1.2410/20 region I've been talking about. It is is off the highs at 1.2344 – actually down 0.2%.

O Canada!

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In contrast while the Aussie also found support at last night’s low of 0.7858ish it is still off 0.70% at 0.7881 this morning. The drift continues for the Australian dollar which could face substantial downside if the US dollar recovery that is presently underway really gains traction.

I've done my usual AUD/USD piece you can read here.

Similarly the drift continues for the kiwi which slipped below the trendline support briefly but then bounced back a little to sit at 0.7208, looking vulnerable and off 0.75%.

The RBNZ decision and statement tomorrow morning will be important. Now would be a good time to give the kiwi a rhetorical nudge if the RBNZ is so inclined.

Have a great day's trading.